This concise guide outlines the key steps you need to take to protect yourself when moving towards a business merger.
From time to time, companies merge to grow their businesses. Just look at the example of SolarCity merging with Tesla Motors. When the business merger was announced, shareholders weren’t too happy. But since the initial shock, many have come around to the view that the business merger makes sense. Musk’s goal was to get everybody off fossil fuels and onto solar-electric. SolarCity will provide the power generation, replacing traditional power plants. And Tesla Motors will replace fossil fuel vehicles, getting rid of the need for gasoline. This way, the whole process of generating energy will be green from start to finish.
The business merger wasn’t without its pitfalls, however. Many worried it could affect the profitability of SolarCity. The merger highlighted the fact that businesses still need to take M&A transactions very seriously. So what can they do to maximise the chances of a great sale?
What is a business merger?
The concept is quite simple: it is about combining 2 or more companies in a new organization. With this, operations and business management are united, as well as their teams. As you can imagine, the process is quite complex. After all, it is necessary to unite different workers, reorganize the corporate hierarchy and analyze which guidelines will be maintained or modified in the new reality.
It is important to note that a merger is different from an acquisition. In this second case, one company absorbs another. Thus, one of the businesses continues to exist while the other legally disappears. As much as it generates major procedural changes, however, the merger relies on a coordinated effort so that the objectives sought in the process are achieved as quickly as possible.
What are the advantages?
The process of merging companies is long and bureaucratic, but it can bring a series of advantages for the organizations involved. Below, we list the main ones.
Revenue increase
Increasing revenue and profits is often the main objective of business mergers. What is expected is that, together, the businesses will be able to increase their conversion and sales volume, positively impacting the entire organization. But beware: increased revenue is the ultimate sum of all the benefits of a merger process!
The idea is not simply to add up the cash inflow of the merged organizations, but to work towards a wider profit, greater than the best-case scenario, with each business running on its own.
Decrease in costs
Bringing together the administrative machines of different companies involves much more than simply layering them. It is important that, during the process, organizations are able to identify which management structures should remain intact, as well as those that should be merged or even eliminated.
The proposal is to create a lean and yet efficient infrastructure to run the business. This leads to an increase in productivity, a reduction in bureaucratic processes, the elimination of logistical and production bottlenecks, as well as the optimized use of the company’s own management tools.
The decrease in overall costs, therefore, has an impact on increased revenue, giving the new organization a competitive advantage. After all, even growing up, she manages to remain agile and flexible.
Business diversification
It is natural that, after a while, the company remains focused on the niche market in which it is successful. On the one hand, if this allows the development of products and services according to their demand, on the other hand, it ends up limiting the organization’s possibilities of action.
When 2 or more companies come together, they take their customer base and an expressive market share with them. A very simple example to illustrate: when a business present only in the Southeast region joins another with great penetration in the North and Northeast of the country, the result is quite powerful.
More than adding market niches, the merger gives the new company the necessary strength to further expand its horizon, starting to have the necessary structure and resources to seek new customers.
And market diversification not only increases the possibility of attracting more customers, but also brings the opportunity to develop new products and services. After all, the know-how of 2 teams come together. Integrated, these teams can have the necessary synergy to consistently innovate.
Reputation improvement
A merger process comes to increase the brand’s weight in the market. And as image is one of the most important intangible assets of any organization, it is important that the process of creating a new brand is able to add to the reputation of participating companies in order to achieve even greater projection.
The entry into new markets itself benefits the expansion of reputation, giving the company the necessary conditions to win new partners, carry out more favorable negotiations with suppliers and even capture investments in the market more effectively.
Growth conditions
Understand: the merger of companies is not an end in itself. In fact, it assumes that the new organization will also need to maintain a growth curve to remain sustainable over the long term. Combining the technical knowledge of 2 businesses, more market niches are reached and even the ability to raise funds is improved. This makes it easier to create solid foundations to sustain growth.
The merger even helps to reduce market risks. After all, smaller companies suffer more in cases of financial instability and are more likely to fail in the face of new challenges. With a sturdy frame, however, it’s easier to weather storms and stay on top of new achievements.
But what about the disadvantages?
The disadvantages or risks involved in a merger stem from the very complexity of the transaction. However, by knowing the potential problems, you are much better able to avoid them. So get to know the main possibilities right now!
Merging processes
Over the years, each company builds its own guidelines and policies, consistent with its market reality and reflecting its internal conditions. It is these processes that give the real identity of an organization, as they show how everything should be done in that environment.
When companies come together, these individual processes must also be brought together. The problem, of course, is in the differences, which, to a lesser or greater degree, can cause conflicts, errors in the transmission of information and even delay deliveries.
As we will still talk about in this post, the review of processes can be a very time-consuming step, but it is essential to reduce friction and ensure complete synergy between the teams.
Balance cultures
Make no mistake: a company does not live by processes and guidelines alone. Each also has its own internal culture. Thus, details such as the required dress code or the way each employee’s vacation is negotiated need to be taken into account in the merger process.
The objective is to prevent former employees from losing their identification with the organization in which they work, which could cause insecurity, friction and loss of productivity. The idea here is to ensure that the clash of cultures does not turn into conflicts. On the contrary, this can be an excellent opportunity to unite the best of both worlds and increase team satisfaction.
Maintain productivity
In practice, changes are always traumatic. Equally true is the fact that every problem ends up impacting productivity. As it is necessary to change both processes and culture, the adaptation period can indeed be marked by ups and downs.
It should be noted that the drop in productivity can be seen in the announcement of a study for the merger. This is because such a situation can easily cause teams to feel insecure about the future of the corporation, making actions slower, bureaucratic and conflicting.
Care, therefore, must be on transparency with employees, suppliers, customers and, indeed, any partner that may be impacted by the change. In addition, it is necessary to act so that the companies’ teams do not face bumps during the transition process.
Measure the results
You already know that big improvements can be expected in the business after companies merge. The detail is that this reality needs to be confirmed with real numbers! And the measurement of results gains even more complex contours when it comes to company mergers.
It is necessary, therefore, to review all the adopted productivity indexes and understand the history of both companies separately to, finally, draw up a strategic plan based on goals that make sense for the 2 organizations.
It is important that this analysis includes both common market metrics such as sales growth, to specific ratios for a merger. It is possible to measure, for example, the training time required for an employee to understand a new control system adopted after the merger.
What precautions need to be taken for a business merger?
Now that you know the main advantages and biggest risks of a merger, it’s time to adopt the right strategies and tools to make the process successful. It is basically about taking preventive action and preparing to make corrections in a timely manner, if necessary. Follow right now some of the precautions that must be taken!
Need to merge
First of all, you need to understand if the merger is really the best option for your company. There are some preconditions that make this process especially beneficial or even needs that make it imperative. It is therefore essential to understand the reasons behind the merger.
This can happen, for example, when a company is in a delicate financial condition and needs to team up with competitors to pay off debts. It can also be the case of a viable capital contribution only with the merger.
Medium and small companies inserted in high expansion markets can also join forces to be able to keep up with this evolution, and it may be necessary to combine different technical knowledge to generate a more competitive business.
The important thing is that managers keep in mind that the merger will bring competitive gains that could not be obtained with the same speed or the same efficiency as opting for other alternatives, such as the solitary investment in an expansion or even the pure and simple acquisition of another one. organization.
Risk mitigation
As the risks and challenges of a merger of companies have already been described, you’ve already taken the first step in tackling them. However, as much as knowing what you have to face is already an advantage, understanding how to overcome these challenges is the real competitive differential.
The best way to start this step in a business merger is to rely on due diligence—commonly translated as due diligence. This strategy is recurrent when acquiring assets or contracting services, but it is also central in the acquisition and merger of companies.
The core idea of the due diligence is the prior analysis of all documents (accounting and financial) that will impact the merger of the companies. It is, therefore, about going through a real fine-tooth comb on the business involved.
The goal is to detect any issues that might stall or block the merge. For this purpose, contracts, acquired debts, ongoing investments and the tax and legal situation of each company are analyzed. Thus, the entire process takes place within legality, with those involved having the chance to correct errors, detect weaknesses and improve compliance before finalizing the transition.
The due diligence process must be comprehensive, involving the accounting, finance, HR, sales, marketing and legal sectors, among others. Thus, not only the past and present of organizations are evaluated, but it is also possible to create a robust database for the strategic planning of the company resulting from the merger.
Process review
When joining 2 or more companies, it is necessary to define which processes will be kept, which will need to be changed and which will be abolished. Once again, this is a complex moment, which requires the integration of various sectors. So as not to get lost along the way, try to follow the step by step we have prepared below! It is enough to list and describe each process adopted by the companies, allowing the managers to understand what they will need to deal with.
How to protect yourself in a business merger
If you’re selling, insist on NDA
Before you get into any discussions with a potential buyer about a business merger, make sure that you get them to sign a non-disclosure agreement. This will help to prevent any company secrets from accidentally leaking out.
Get experienced lawyers
Most companies don’t have expertise on the legal pitfalls of business merger transactions. That’s why it’s so important to hire specialist lawyers, like Jerry Sokol, to provide advice and information on the matter. Your legal representation should have a proven background in M&A law.
If you’re the CEO, don’t negotiate the business merger terms
CEOs shouldn’t negotiate M&A terms because of the potential conflict of interest. Instead, the terms should be managed by the board of directors. The board should then proceed with negotiations, trying to get as high a price as possible if they’re on the selling side. The best way to do this is to start an auction.
Beware the letter of intent
When the buyer decides that they want to acquire your company, they’ll usually send you a letter of intent. The purpose of the letter is to lock up the deal and give the buyer exclusive rights to buy the company. Of course, these letters are rarely in the interest of the seller. The exclusivity period is often an attempt to shut down the ability of the seller to attract new buyers. Plus, these letters often has rigorous requirements that aren’t always in your interest.
Avoid common preparedness issues
When a buyer comes to your company, they’ll expect to see your records. They’ll want to look through your financial stocks, invoices, minutes from meetings and so on. As a business, you need to be ready to provide this information quickly.
Your next priority is to design and build a business merger schedule that details the stages of the merger. When will your accounts be integrated with the buying company accounts? When will you move your employees to the new office?
Finally, it’s important to be realistic about the amount of business you expect your company to do in the future. Don’t risk your ruining your relationship with the buyer. Always give accurate and conservative forecasts of your future business potential.
