A business merger is often compared to a marriage. Much like that romantic union, a business merger involves consolidating two companies into one. Often confused with an acquisition, a business merger is different because this scenario involves the creation of a new entity – while an acquisition is one company bringing another into its fold. Of course, there are a number of important questions to ask and steps to take before leaping into that arrangement.
Step 1: Hire a Business Broker
It will be an invaluable help to hire an expert in mergers and acquisitions. The fact of the matter is, no two mergers are exactly alike, and an experienced Houston business advisor can begin assisting you by determining which kind of merger is right for you. This is particularly true if you are looking to buy a business and join it with your own existing business. Choosing the right business broker can take some time and research.
Types of Mergers
1. Conglomerate Merger: Two companies with little to nothing in common are joined together.
2. Horizontal Merger: Two companies with very similar (or even identical) products/services are merged together.
3. Vertical Merger: Two companies in the same industry come together.
4. Concentric Merger: Two companies with an identical customer base, but offering different products/services are combined.
Step 2: Make an assessment of the Companies Involved
In this step, an advisor will help you assess the health of the companies involved. Similar to a “standard” business sale, the companies involved need to be financially healthy in order to begin the merging process. One major thing to examine is the liquidity of each company – i.e., determining if the companies have enough capital to move forward.
Step 3: Set Goals
Before beginning any process, it is important to understand why you want it in the first place. Ask yourself these questions:
- Are you looking to increase your customer base?
- Are you hoping to diversify your products/services?
- Are you hoping to reduce costs?
- Are you looking to decrease competition?
- Do you hope to introduce new products/services in the future?
Step 4: Agreement Terms
This is an important step. By this point, you need to iron out the details of the merger. For instance, parties involved may need to determine how much financial information to share and when, as well as potential exit strategies.
Step 5: Merge
A business broker will guide you through the process of drafting a purchase and sale agreement, reading the fine print, revealing confidential information at the appropriate time, and finally, reviewing the legal documents before anyone signs.
Because small businesses are a major part of Houston’s economy, it is not uncommon to consider merging with a friend, or even a competitor. When the time comes to consider this scenario, contact your local business advisors, Transworld Houston. We’re ready to help you establish the business of your dreams!