Should Your Business Consider a Merger or Acquisition?

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Two hundred thousand businesses above the normal may have closed throughout the United States from March, 2020 to February, 2021, according to a recent Federal Reserve survey. While that is fewer than expected, it still shows a significant impact from the Pandemic.

Individual companies account for about two-thirds of the extra closures according to the Fed economists, who examined businesses with employees.

Barber shops, nail salons and other providers of personal services appear to be hardest hit, according to the Fed study, accounting for more than 100,000 establishment closures beyond historically normal levels.

If your business is among those who have adapted to new market conditions and are thriving as the economy recovers, this might be the ideal time to take advantage of growth opportunity through a business merger or acquisition.

Merger

A merger occurs when company owners of two or more businesses agree to combine their companies in an attempt to expand their reach, gain market share from competitors and reduce the cost of operations. In larger firms, their respective boards of directors should approve the merger, and seek approval from both companies’ shareholders.

Usually, the companies that agree to merge are almost equal in size and earnings; thus such deals are often called “merger of equals.” After a merger, the two individual companies cease to exist, and a new company is born.

Acquisition

Unlike mergers, acquisitions are technically purchases. A more profitable company decides to buy most or all of the company’s shares in order to gain control of that portion of the company. There might be competitors or compatible businesses available at bargain prices due to current economic conditions.

If the acquiring party purchases the entire company, then the latter becomes entirely part of the acquiring firm or if the acquisition has a favorable market position, it might be beneficial to keep the current business branding.

Consolidation

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.

When to Consider M&A

Now that you are aware of some of the common terms under the M&A umbrella, you should determine when your company needs to enter an M&A deal. Mergers and acquisitions can take place due to a variety of reasons:

Grow income and market share — These are the two most common reasons firms enter into M&A agreements. For instance, if a shoe company wants to expand its merchandise to men’s and women’s apparel, it can acquire another business that already has a loyal consumer base in those markets. If the merger or acquisition goes smoothly, that business may be able to enjoy increased market share, more profit and a wider audience.

Survive unforgiving competition in the industry — In some cases, a business may find itself outdated and outgunned when it comes to the latest innovations in the industry. (Just look at Kodak.) That particular company could soon become unprofitable and experience a painful demise.

Take over competitors — One traditional way to get rid of competitors is through acquisition. However, even if you have the finances to take over your rivals, you have to make sure you can streamline their operations into yours. In addition, you also need to ensure that the employees of the acquired company can cultivate a workplace culture that is similar, if not identical, to yours.

M&A is a powerful strategy that companies have been using for many decades. As long as it is done correctly and with enough preparation, you’ll be able enjoy its benefits, in the long run, should you choose to do it.

Bruce Barrett is a Commercial Broker with Windermere Commercial RE and a Certified SCORE Mentor. He may be contacted at barrett@windermere.com

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Bruce Barrett, Certified SCORE Mentor — SCORE Central Oregon

Bruce Barrett is a Certified SCORE Mentor with SCORE Central Oregon and a broker with Windermere Commercial Real Estate. Contact Bruce at barrett@Windermere.com

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