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Is a Merger the Way to Grow Your Business?

Most smaller businesses grow slowly. They acquire new customers, add more products to their range, and expand into new territories as their resources permit. However, increased competition can mean that this slow rate of growth is inadequate to retain existing share-of-market. Or a business can simply reach a plateau where further growth isn’t possible without finding new sources of capital and increasing the company’s risk exposure.

 At times like these, business owners may well consider the possibility of merging their company with another business. A simple definition of a merger is: “A joining together of two previously separate businesses when both businesses dissolve and fold their assets and liabilities into a newly created third business entity.”  The two organisations can be similar to each other or they can be complementary to each other, but at the end of the process they become a totally new business with a new leadership and a new culture.

There are benefits to merging

Why might you want to merge your business with another business? You might want to extend your geographical reach or simply acquire a large number of new customers. You may need to diversify your product range into higher profit areas, or you may require the capacity to fund the development of new products.

However, it’s estimated that about half of all mergers fail to achieve their projected goals. This means that great care needs to be taken before beginning the often expensive and time-consuming process of merging two enterprises.

What to look for in a merger prospect

The ideal business to merge with is one that will complement your organisation. Their strengths will offset your weaknesses and the merged entity will be synergistically stronger than the two firms were individually. When evaluating a potential merger partner:

·     Look at their management and decision making methods – are they similar to yours?

·     Look at their culture. Is it positive? Is it compatible with yours?

·     Is their marketing effective and well targeted?

·     Is their approach to IT up-to-date?

·     What is their risk profile – do they take too many chances or are they too risk averse?

The aim of the merger is to retain the best aspects and eliminate the weaknesses of each party. A dominant party seeking to retain a bad practice or product can easily create the foundations for a later failure of the merger.

Steps to merging

The two companies must recognise what's good about each other and what needs to be changed, and then determine jointly how they will face the future as a unified force. Before a merger can take place there are several steps that each party must take:

·     Extensive due diligence must be conducted on both businesses

·     Conduct a SWOT analysis on both businesses

·     Decide which products will be retained and which will be dropped

·     Prepare a comprehensive model showing how the new entity will operate

·     Know which employees are essential and which will be let go

·     Agree on a management structure including who makes decisions and how they are made

·     Agree on a system of remuneration

·     Pre-negotiate issues of ownership and responsibility

Invest whatever time and funds are necessary before the event, verify all financial data and get financial and legal advice before proceeding.