Should I Merge My Business With Another Business?

As a business owner looking to take your business to its next stage, you may consider acquiring a business or merging your company with another. A successful merger between two small or medium-sized companies can benefit your business and its profits. Equally, however, there are several essential factors that you need to keep in mind to have a successful merger. This article will explain some critical considerations if you want to merge your business with another.

What is a Merger?

Simply put, a merger is an agreement between two companies to unite into one new single entity. Mergers are slightly different from acquisitions, although the term ‘mergers and acquisitions‘ (or M&A) is common. An acquisition (sometimes called a takeover) is where one company buys out an existing company. An acquisition does not usually result in a new entity. 

There are different reasons your company may want to merge and different types of mergers.

Reasons to Merge

The main reason behind a merger is usually to increase shareholder value. Shareholder value is how well a company can deliver value to equity shareholders in a business. This is usually through increased dividends and capital gains to shareholders. The idea is that through a merger, your company will be able to increase sales, earnings, profit, and free cash flow in your business. In the longer term, this should increase share prices in your company. 

A newly merged company should be able to increase shareholder value because the merged companies will have a more expansive reach to consumers and will also have more market share. Furthermore, a merger can also help you:

• reduce production costs;
• unite common products;
• take advantage of the talent of the firm you are merging with; and
•  make use of their assets (including intellectual property). 

Types of Mergers

There are different types of mergers used in different situations depending on the goal of the merging companies. 

Horizontal Mergers

A horizontal merger is between two firms operating in the same industry. This type of merger usually cuts production costs or grows your market share to compete with more prominent companies operating in the same industry. Additionally, this merger can be suitable if your business wants to scale to compete with large companies.

Vertical Mergers

On the other hand, this merger is between two companies that operate at different stages within the supply chain of one industry and one product.

For example, a transportation company may merge with a container selling company. The idea here is that you will reduce costs and create synergies.

Congeneric Mergers

A congeneric merger is a merger that combines two companies that operate in the same market to add the product of one company to the product line of the other company.

Conglomerate Mergers

A conglomerate merger is a merger between two companies with unrelated business activities. This type of merger may be less attractive if you are a small business, as the synergy opportunities may not be as obvious. 

Should I Merge My Business?

For the reasons mentioned, a merger can be a perfect way of scaling your business, reaching new markets, building new products, and competing with large companies. However, there are also several questions that you should ask yourself if you are considering merging. For example:

• is my business ready for a merger, or could I get a better deal if I tried to expand on my own first?
• what are my aims with this merger: am I trying to create supply chain synergies, reach a new market, or develop a new product?
• is the other company the right fit for my business and its goals?
• have I done my due diligence on this merger?
• how will this merger affect my shareholders? and
• what are the proposed terms of the merger?

Key Takeaways

A merger can be a great way of scaling your business to compete with large companies. Equally, however, you should make sure that you know precisely your aims and goals for your business and the type of company that would help you achieve them. A new entity can help boost your business, but if it goes wrong, it can also distort your overall strategy and reduce the value of your shareholders. As a result, it is good to seek professional financial and legal advice before a merger process.

If you need help with a merger, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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