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Your one-stop guide to mergers and acquisitions for small to medium businesses


Chooli

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It is a common misconception to think that mergers and acquisitions, popularly referred to as M&A is only for large-scale, multi million businesses. Even in the local or regional set-up, M&A arrangements can be a power move for small and medium-sized enterprises (SME).

The concept of fast growth and value generation through M&A works just as much for SME, as it does for larger ones. When executed the right way and with the aid of the right financial advisors, the synergy of your business and another can take your company into an entirely different level and enable broader strategies for the future.

Synergy is one crucial factor that has to be considered and worked on when engaging in a prospective M&A deal. In M&A, synergy refers to the union and dynamics of two businesses whose combined value and strengths will be greater than two separate individual firms.

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Since this topic basically tackles the fusion and absorption processes of companies, and can be quite a daunting discussion for some, here we walk you through a comprehensive guide of all the fundamentals you need to know about M&A.

A merger agreement happens when the owners of two or more businesses agree to combine their companies with the aim to optimize and inflate their reach, gains and market share from competitors and also lessen the operation cost. In most cases,  companies that agree to merge are equal in size and earnings. After the merging, the two companies cease to exist and a new company is born.

An acquisition agreement takes place when a more profitable company decides to purchase most or the entirety of another company’s shares to gain control of that portion of the company. Acquisitions are easier to deal than mergers because only the obtained part of the business will be affected by the transaction. However, if the purchasing company buys the entire firm, then the latter becomes entirely part of the company. Acquisitions give the business a substantial boost, not only in profits but bring to light new market and business operations.

Consolidation is an M&A agreement that creates a new company with all the assets, liabilities, and other financial entities of the responsible parties. This combination is done to combine talents, increase profitability, and transform competing firms into one, cooperative enterprise.

What are the advantages and disadvantages of M&A?

It is crucial to arrive at a decision only after getting a view of the whole picture of the deal. M&A agreements come with a long list of benefits, one of them being significantly able to reduce costs with regards to operations, technical and administration matters. It all falls in the concept that the larger the business is, the better the rates of interest are since there is greater opportunity to grow profits on an expanded scale. Other benefits include:

Geographical expansion - Acquiring a similar business goes beyond the restrictions of growth and customer profiling by giving you broader growth opportunities in a different geographical location. This applies for both branches and the business as a whole.

Diversifying industries - In an acquisition agreement, the company acquiring suppliers or service providers has the benefit of diversifying industries and is also allowed to  control the supply-chain and the prices applied to it. This makes the entire process more efficient and profitable for the business.

Expansion of product lines – Acquiring a business with a similar product line as yours or a product that would suit what your company offers can diversify and expand the product lines and options unlike settling with the line you have upon inception. 

Access to new technologies – Be more cost efficient and effective by acquiring a company that already has access to new technological innovations than attempting to build new ones in the house. 

Reducing competition - Enjoy more power and less pressure to reduce your pricing as you hold a larger market share

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Some of the disadvantages that you may want to weigh in and consider may be in the process of the integration. Anticipate for certain setbacks to arise in the merging of two companies with regards to differences in management, culture, priorities or goals. It may result in a gap in communication and affect the performance of the employees and the company in its entirety. This makes proper communication and coordination one of the pivotal points to observe in the process of M&A.

Difficulty in synergies may arise in cases where there are few commonalities between the two companies. It is also important to consider that the larger company may be unable to inspire and motivate their employees and have the same degree of control as with the smaller company, which might eventually affect the economic scale. Lastly, a merging company may decide to remove underperforming assets of the other company which may result in employees losing their jobs.

When to consider M&A?

Although the list of the benefits may seem endless, just considering the benefits is not enough. It is important to determine the right time and the right reasons before getting into the deal. Here are a few:

To grow income and expand market share are some of the most common reasons why firms decide to enter into M&A agreements. For example, if a burger fast food chain wants to add cakes to their line of products, it can acquire a pastry business that has a strong consumer base. If the M&A process runs smoothly, the business may have increased market share, more profit and wider reach of the audience.

Surviving tough competition in the industry is another reason why businesses get into M&A. In order to get through, businesses that find themselves outrun and outdated by other latest innovations in the industry or market would allow itself to be bought by another firm in hopes that they can avoid being unprofitable and eventually cease to exist.

Rise above competitors Acquisition is one of the most common ways to give you leverage over your competitors. With more shares, profits, wider audience reach and not needing to reduce the price, this will definitely give you a boost in the market over your competitors. You just have to make sure the company you acquire can integrate their operations to yours and the workplace culture is similar to your firm for it to run smoothly and effectively. 

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M&A Best Practices

Before getting your business into an agreement, you have to  make sure first that you accurately set the value of your company. You might need the assistance of financial advisors to determine this. You may also want to decide on several options for financing. If you’re not financially prepared, most especially when you are on the buying side, you may end up making a wrong decision.

M&A may be an intricate process that requires thorough analysis and meticulous attention to details. Here are some best practices that you may want to observe as you go through your decision making. 

For the Buy Side:

  • Observe diplomacy and professionalism when approaching the other company and take your time to be acquainted with their position while being sensitive as to how they could possibly receive your offer. Understand the company’s position before initiating contact, and be sensitive as to how your offer might be taken. 
  • Seek advice from experienced financial advisors to help you land a deal that best suits your goals and needs. 
  • Aside from the technical and operational aspects, consider that your companies’ values, culture and workplace ethics align with each other.
  • Develop a sense of trust and keep communication open among all parties.
  • Create a transition plan, so you don’t dive into integration too drastically.

For the Sell Side:

  • Be aware of the strengths and weaknesses of your position. Involve a financial advisor who will have your best interest in mind in the decision-making process.
  • Don’t jump at the first offer. Bring multiple buyers to the table to increase value.
  • Build relationships and engage in conversations with other buyers. Do not just rely on analysis.

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Throughout the process, it is important that communication is kept open and honest. Anticipate that issues may arise on both sides but the right communication and coordination may work wonders in creating a successful integration. An effective M&A relies on keen attention to what is and isn’t working and finding ways to compromise for the business to continue as one entity.

Four Types of Mergers and Acquisitions

Here are four of the main ways companies join forces:

Horizontal Merger / Acquisition

This transaction takes place when companies that sell similar goods and services merge. This is a business consolidation that occurs between businesses that are selling the same line of goods and are often competitors in the industry. Since this type of M&A deals with similar product lines, the purpose of this is for companies to expand their range and are not necessarily doing anything new. There tends to be higher synergies and  profit for firms who engage in horizontal M&A.

Vertical Merger / Acquisition

Vertical M&A take place when two or more companies that produce separate services or components along the same supply chain join forces. Vertical mergers are a way for companies to significantly cut costs, boost profits, broaden their market, and turn their focus on bigger goals of improving their company. For example, a company that sells clothes and apparels may merge with another company that supplies buttons, zippers, etc. By doing so they become more vertically integrated in a way that they can improve logistics, combine workforce and manpower and significantly reduce time and effort to purchase product materials.

Conglomerate Merger / Acquisition

Conglomerate M&A takes place when two companies in different industries join forces or one takes over the other in order to broaden their range of services and products. These are firms with totally unrelated business activities and with absolutely nothing in common. For example, a food company buys a clothing company. This approach can help reduce costs by combining back office activities as well as reduce risk by operating in a range of industries.

Concentric Merger / Acquisition

Concentric M&A happens when two companies share the same market in the same industry but provide different products and services. Although different, their products must be able to complement each other. For example, a clothing company merged with a shirt printing firm, may be considered concentric in nature. 

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Conclusion

Mergers and acquisitions are some of the most difficult maneuvers to pull off in business but that doesn’t mean it isn’t one of the most powerful moves for small to medium sized businesses to widen their market and broaden other business opportunities. In the process of M&A, make sure that the company cultures are compatible with each other and the leadership structure of the new enterprise is sorted out well in the early stages. It is important to consider the corporate structures and the similarities of the two companies’ culture. Lastly, be as transparent as possible throughout the process. Being comprehensively aware of these potential roadblocks should dramatically decrease the chances of something unwanted occurring during the agreement.

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Edited by Chooli

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