Growth is a goal for many businesses, and there are multiple ways to grow a company. You can introduce new products, move into new markets or increase the volume of products you produce. Another way to expand your company is to purchase or acquire a competitor or complementary business. You can also merge with a company, joining forces for mutual expansion.
There are several benefits to a merger and acquisition (M&A) expansion, making it the ideal growth path for many companies. A business broker can help you navigate the M&A process, ensuring you get the best value possible and reach a deal that benefits you.
Why Expand Your Business With Mergers and Acquisitions
A business merger or acquisition is a popular growth strategy for companies for a few reasons. It can be a particularly smart decision in specific situations.
When you acquire a company you also acquire its customers. If you have complimentary products you have a ready-made group of new customers to sell more products or services to.
Acquiring or joining another company can give your business access to certain types of intellectual property (IP) and a greater talent pool. If your company buys a competitor, you get to use that competitor’s IP as your own. If the competitor has a top-notch team, your company also acquires the team in the acquisition.
M&A can create cost synergy, helping reduce your company’s overhead. For example, if your business buys a company that produces a critical part for your signature product, you may reduce production costs. After the acquisition, you no longer have to pay the vendor to purchase the part, lowering the cost of creating your signature product.
You can also enjoy cost savings by eliminating redundancies after an M&A. Once your two companies merge, you can share office space, administrative teams, and other expenses.
M&A can also increase your company’s revenue by reducing competition. After buying a competitor, its profits become your profits. You no longer have to fight for market share.
Types of M&A
While the terms merger and acquisition are often used together, they have different meanings. When your company buys another company outright, taking it over, you’re acquiring it. If your company joins with another company, creating an entirely new one, you’re merging.
Several types of M&A exist based on the structure of the purchase and the overall goals. M&A types include:
- Horizontal: During a horizontal M&A, two companies in the same industry join together, creating a single entity. Horizontal mergers are often ideal in smaller industries where there isn’t much market share.
- Vertical: During a vertical M&A, two companies in different industries join together. Often, the companies operate at different supply chain levels and aren’t competitors. Company A, which produces medical device parts, might merge with or acquire Company B, which builds medical devices.
- Conglomerate: During a conglomerate M&A, two businesses that seem to have little in common join together. A shoe company might buy a beverage company, or a fast food chain might buy a television channel. Conglomerate M&A can reduce the risk of loss, as the company has something to fall back on. It also expands its customer base and allows you to diversify.
- Market extension: A market extension merger or acquisition sees two companies that sell the same product or service in different markets join together. For example, Company A, which sells widgets in the U.S., could buy Company B, which sells widgets in Canada.
- Product extension: A product extension M&A brings together companies that sell similar products in the same market. A company that makes plastic cups might buy a company that makes drinking straws, for example.
How to Expand Your Business Through Merger and Acquisition
Whether you’re merging with another company or acquiring a business, there are a few steps to follow to ensure the process benefits your company and you get the maximum value from it.
Consider the type of business you want to acquire or merge with, whether it’s a competitor or a company on the same supply chain as yours. There are pros and cons to each option, and an experienced business broker can guide you through the decision-making process.
The next step is to determine the value of the business you want to acquire. A business broker can help you value the company. An experienced broker has access to a wide network of companies and knows the market well. They want you to get the most out of your M&A.
Once you know how much the business is worth, find a way to finance your purchase. The company you’re acquiring might want cash upfront or be willing to accept loan financing. Your business broker can connect you to banks and lenders that can provide funding if you need it.
To move forward with the merger or acquisition, you and the other business need to come to an agreement. The sales agreement will outline what you’re buying, how much you’re spending, and other sale terms.
During this phase, you should think about how the company will operate after the expansion is complete. If you’re merging with another business, will employees from both companies stay on? If not, you need to decide who is staying and who isn’t. Also, consider who will be responsible for repaying any debt the business brings into the new company.
A merger leads to the creation of an entirely new company. Once the ink is dry, you might need to set up an entirely new business, get a new employer identification number (EIN), open new bank accounts and apply for new licenses or permits.
What to Expect When Expanding Your Business With Mergers and Acquisitions
Ideally, your merger or acquisition will go as smoothly as possible. In reality, there might be a few hiccups along the way. Experienced business brokers can be on your side during any negotiations, ensuring you have the best chance to negotiate an offer that works for both parties.
Due diligence is also part of the M&A process. Learn as much as possible about the company you’re buying or joining with. During due diligence, the company’s operations will be assessed in detail, as will its financials. It’s an exhaustive but critical step, as it protects you from acquiring or merging with a company that might not be as healthy as it appears on the surface.
Contact Synergy Business Brokers About the M&A Process
If merging with another company or acquiring a company seems like a suitable growth strategy for your business, Synergy Business Brokers can help. Please view our businesses for sale. If there is a business of interest please fill out our electronic NDA on the listing that you would like more information about. We’re an award-winning business brokerage specializing in selling companies valued between $600,000 and $40 million.