For small businesses looking to expand, considering a merger or acquisition can be an efficient way to develop and increase market share.
Here, Steve Hale, partner and M&A specialist at Perrys Chartered Accountants, explains what small businesses need to know when looking to merge with or acquire another company and shares some top tips for making a merger or acquisition successful.
What is the difference between a merger and an acquisition?
Mergers and acquisitions are often confused as the same thing. However, there are some important differences between the two.
A merger is when two business entities come together to create a new, joint organisation. The businesses on both sides will agree to new ownership (often with the owners of both businesses taking on joint responsibilities), management and policies. Typically, a merger is a friendly agreement between two similar-sized competing businesses. Merging two companies together can help to create mutually beneficial structures that will reduce operational costs for both sides, while aiding expansion into new markets and helping to boost revenue and increase profits.
Unlike a merger, an acquisition is when one company purchases another and takes over all its operational decisions. Sometimes referred to as a ‘takeover’, an acquisition will allow the purchasing business to have complete power over the business it acquires. Therefore, acquisitions will usually require a lot more financial input. Companies that acquire another might be looking to remove a competitor and increase their market share or wanting to utilise the target company’s knowledge to expand product lines as well as utilising other assets to reduce long term investment, research and development costs.
Is the business ready to grow?
Before embarking on a merger or acquisition, you will need to understand whether your business is in good financial health and can feasibly invest in a new venture. Consider how the transaction will be funded and the level of liquidity required to complete it successfully. Planning a funding strategy will be key to proceeding to the next stage.
How is a business valued?
There are a number of ways that a business can be valued. For a trading business, the most common method will be based on a multiple of adjusted earnings. A good accountant, who is experienced in this area of work, will be able to advise you on the most appropriate method.
Is the target company a good fit?
It is important to carry out due diligence on any potential business you are looking to merge with or acquire. This means more than just checking their balance sheet, but also evaluating whether a business is viable or likely to negatively affect you. This means investigating everything from its staff and existing clients to its technology, operations and legal obligations, including debts, tax issues, supplier and employee contracts, and any current legal proceedings.
Seek professional help
Mergers and acquisitions can be complex and lengthy processes with implications for both sides. From finding the right business to negotiating integration, appointing a professional will be key to ensuring a transaction goes smoothly. An experienced M&A accountant will be able to help with:
- Strategic planning
- Identifying suitable target companies
- Carrying out financial and operational due diligence
- Preparing financial projections
- Identifying potential financial sources
- Assisting with negotiations and post-merger/acquisition integration