If you want to expand your business in the near future, you need to look into mergers and acquisitions. M&A might sound like something meant for larger corporations and franchises, but small-scale ventures can also reap substantial rewards from this strategy.
Consolidation is common during economic slumps, as some businesses are forced to put themselves up for sale.
But the changes brought about by COVID-19 have some investors and experts anticipating a possible wave of activity in British Columbia and throughout Canada.
Let’s set the stage with a quick primer on mergers and acquisitions.
The basics of mergers and acquisitions
First things first, you should know the differences between a merger and an acquisition. Knowing the clear definitions will help you plan your next steps forward. That way, you can determine what type of business offer you’re going to present to the other entity.
A merger
A business merger begins with two businesses of equal size that are separately owned and operated. With a merger agreement, they create one joint legal entity. A merger blends the two businesses together to create a new one under joint control
A good example of a successful merger is when the book publisher Penguin combined with the publisher Random House, creating the company Penguin Random House.
At its core, the concept of a merger is supposed to be mutually beneficial. You can see how this is challenging, since it’s unlikely that both businesses will have the same features — staff numbers, profit projections, regular cash flow, etc. One operation will probably have a little more to gain from the decision, while the other will have more to lose.
An acquisition
An acquisition also begins with two businesses that are separately owned and operated. But they do not have to be of equal size, and the end result isn’t a brand-new legal entity.
In this case, a business with higher standing buys the second operation.
If you’re looking for an example of a company acquisition, look no further than Disney. Disney has successfully acquired media properties like:
- Marvel Entertainment
- Lucasfilm Ltd.
- Pixar
- 21st Century Fox
It’s an exceptional example, but it should give you an idea of what a much larger entity can do when it’s interested in smaller forces in the market.
Sometimes, the second operation keeps its name and continues to run as usual, except under the management of the buyer. More often than not, the smaller business is absorbed into the buyer’s structure. This is why you will hear an acquisition being called a “takeover” or a “buyout.”
Why would your small business want to merge with another?
Not every merger will be alike. Every single business will have a different motivation behind their decision to create a joint entity. Here is a brief overview of the types of mergers that might be necessary for your own operation.
Horizontal merger
A horizontal merger is when a business joins forces with its direct competition. They have the same products. They cater to the same market.
Instead of vying for attention and hoping to outdo each other in sales, they merge into a single company.
The move allows both companies to avoid losing out to their direct competition. For instance, a popular furniture store could combine with another trendy furniture store in the neighbourhood.
Vertical merger
A vertical merger is when businesses along the supply chain join together. For example:
- A car manufacturer merges with a tire company
- A coffee roaster merges with a coffee shop
Bringing these links in the chain closer together often saves money for both parties. It can also prevent other competing companies from getting access to the lower-level supplier.
Market-extension merger
A market-extension merger is for two businesses that sell the same types of products but to different markets. This is more likely to happen with businesses that aren’t situated in the same geographic location. By joining together, they can increase their reach.
Product-extension merger
A product-extension merger is for two companies that sell different but related products in a market.
For instance, a women’s clothing retailer joins forces with a retailer that only sells women’s shoes.
They are still trying to attract the same consumer. The goal is to keep that customer at their location longer because of the increased product selection.
Congeneric merger
Finally, a congeneric merger involves two companies that share the same customer base but provide very different services. For instance, an airline can join forces with a tourism company.
In the big picture, they both cater to people who want to travel. Otherwise, they have nothing in common.
The goal of this type of merger is for the two companies to create synergy and take advantage of their customer overlap, leading to a bigger share of the market.
There has to be some reason behind your merger.
Don’t pick an operation at random and hope that the joint process goes over well. Discovering your motivation will help you choose the right business to combine with, raising your chances of achieving profitable results.
Why might you want to buy?
Acquiring a business also allows you to reach goals like extending your customer reach or expanding your product lines. While these are similar to merger goals, you will benefit more from the results as the buyer.
Since the second operation is absorbed into your own business, they don’t get to reap the rewards in the same way. This does not mean that they don’t have any benefit at all, but the outcome is in your favour.
These are some other reasons why you would want to buy instead of merge:
- Increase market share
- Reinvigorate declining status in your market
- Eliminate direct competition
- Gain a competitor’s top talent
- Protect your own business from getting acquired in the future
Regardless of whether you buy or merge, follow these steps to make the process a success:
1. Do your research
You have to do your research to see if the acquisition or merger with this business makes sense for you. Take the time to look into basic information about the operation like:
- Number of staff
- Growth rates
- Marketing campaigns
- Online presence (website, social channels, etc.)
If the information doesn’t look promising, you shouldn’t go forward with the proposal.
2. Gather your team
You will need a group of specialists to get started. This will likely include an:
- Investment banker to deal with your business’s financial matters and to look into the financial stability of the other operation
- Acquisitions lawyer
- Executive who represents your operation and attends the negotiations
When you reach a successful agreement, you will want other experts to make the integration as smooth as possible.
A human resources expert can handle staff changes. An IT specialist can handle tech changes. A PR (public relations) expert will promote the deal to your partners, clients and customers.
3. Pull together crucial documents
You will need certain documents to make things official and confidential. This could include a:
- Non-disclosure agreement
- Confidential information memorandum
- Letter of intent
- Indication of interest
- Purchase agreement
These can all be drawn up as soon as you’ve settled on a target for your merger or acquisition.
4. Approach with your offer
Once you have your documents, you need to approach the company with your offer. Make it sound like a positive and exciting opportunity, whether it’s a merger or acquisition.
In an acquisition, you should be offering between 75 to 90% of the business’s current worth.
Anything lower might be considered underwhelming or insulting, which could make the deal turn sour.
5. Negotiate the terms
It’s not likely that you will make the deal straightaway. You will go back and forth on the terms of the agreement in hopes of reaching a satisfying conclusion for both parties. Eventually, you will settle on a price and smooth over any small creases in the proposal (e.g. staff members that are staying on).
6. Sign the contract
The last thing that you have to do is sign the dotted line. Have a contract lawyer draw up the document, and make sure that they oversee the process to guarantee that everyone follows the agreement to the letter.
Mergers and acquisitions — not beyond your reach
As you can see, M&A isn’t just a possibility for big corporations. Small businesses can use these strategies to completely change the trajectories of their operations. All you have to do is find out whether you want to do a merger or acquisition, and then follow these steps to make the deal go through without a hitch.
This post should not be taken as legal or financial advice. Always consult legal, financial and other relevant professionals before undertaking a merger or acquisition.
