Business Merger – should you consider it?
Businesses frequently merge with other businesses when a growth opportunity for both is present. However, it is wise to carefully consider a long term strategy before jumping in with both feet. You need to consider what your future goals are and what is needed to realize them.
The most important thing to remember about business mergers is – if your business is not already thriving, a merger won’t help you. You need an avenue of “organic growth” on your own, before a business merger can benefit you.
Having a realistic and professional valuation of your business is paramount!
Most business owners do not :
- Know how much money the business can potentially make.
- Emphasize the profit aspect.
- Have full control their working capital.
- Value the business realistically – emotional investment does not carry over to “real world” value.
Even though rational valuation is essential, it’s not just about the monetary value. People will not buy or merge unless they think they’re getting “real world” value. Future growth potential is what keeps people interested in a business merger. Succession planning is a big factor here. Each business needs to be able to reinvent itself and evolve, but many companies put off this kind of planning.
A successful merger absolutely requires strong leadership; leadership that recognizes when you need to merge or acquire (or possibly, be acquired) and is capable of communicating goals effectively and acting promptly.
Most businesses never do more than one business merger in their lifetime, so failure is commonplace. We present you with a checklist to help you review major concerns before merging with, or acquiring, other businesses. Answer them all before entering into any mergers or acquisitions. Decide what you will not negotiate and plan to stand firm. Also, answer the question, why do you want to enter into a business merger – or become acquired. Is it to acquire new capabilities, increase profits, offer new services or expand your territory?
Financial Considerations of business mergers & Acquisitions.
How will this merger or acquisition help you realize your strategic goals? You need to spend a lot of time on this one. If you can’t answer that question, there is no reason to merger.
- Strong leadership skills are essential – once the business merger has happened you will be a larger operation and need a more seasoned leader. Leaders and managers are two different entities. If your skills as a leader of people are weak, then you need to bring one in from the outside, especially if the other party of the merger is led ineffectively. A two sided weakness in leadership, in a business merger, spells certain failure.
- Where is this new and larger business going to locate? If the merger doesn’t yield a larger space for operations, you must move to a larger facility. Does either of the two merger candidates have a “heavy contingent liability” in the lease? That alone can make a deal seem a whole lot less desirable.
- Can you also “merge” the two groups of employees, managers, etc, into a smoothly functioning whole? Will there be a company renaming? This factor shoots down lots of prospective mergers. Work this out amicably at the onset of negotiations.
- Will one or the other of you lead the business or will it be a leadership coalition?Bear in mind – Power sharing does not often work.
- How will the new company “bureaucracy” (combined chain of command, etc) be rebuilt?
- Does one of the businesses generate more profit than the other? How will that affect profit sharing?
- Will the newly merged business be more profitable – short and medium term? Often the first year takes a toll on earnings. Productivity usually suffers while everyone adjusts to new systems and responsibilities. Be ready for this with clever ways to deal with it.
- Will the owners of the newly merged entities need to come up with more capital? Understand the funding strategy and agree on any impact on earnings.
- Employees of both companies have to be informed of the business merger. You will need a coordinated plan for both wings of the merger. If rumors of the business merger leak before you are ready, you could lose loyalty AND employees. You need to inform your key players as soon as possible. Bring key personnel you want to keep, into your inner circle as soon as feasible.
- There will be issues among newly merged employees. Many will involve salaries and benefits between the two companies. Beyond salaries and other compensation, they will all be concerned with how the merger will affect them. One way to retain employees is to offer a “retention bonus”, payable at the end of their first year after the merger.
- Project the effects of the business merger over a year or longer, and discuss them.
- Lastly, are there any issues that would kill the deal? These can appear at any time, but its best to be up front with any potential hot buttons – it can avoid lots of wasted time.
Business Merger Issues Involving Personnel
For best chances of success, work these issues out before forging ahead with a deal:
- Create a “transitional merger team” with your key players and get them working on a plan!
- Quickly identify what is NOT working and work on suitable compromises.
- Do you have a way to track company morale?
- Will this method ferret out who will feel slighted or threatened by the impending merger? How will you address their concerns?
- Is there someone concerned employees can go to for answers?
- Do you have an entity specified for rumor control?
- How will you quell negative organized “scuttlebutt” about the business merger? You’ll need to act quickly to avert a “revolution”.
- There will be gains and losses for your newly merged staff. Can you reassure your employees? Can you offer them any acceptable substitutes for what they lost?
- General productivity usually suffers after a merger. Do you have a plan to mitigate this liability?
- Mid and upper level management – new and existing – may make power plays to keep, or establish, their hierarchy in the pecking order. You will have to have a plan, in advance, to avert such chaos.
- Check your current state or local employment laws regarding who can and cannot be let go. You may end up with two people in the same position.
- In contrast to the above, some key players may bolt on hearing of the change in structure. Make plans to inform key people of their continuing opportunities with the new entity.
- Will you need to retrain – or set guidelines for current methods to be adhered to?
- Track employee performance over a 12 month time frame to reassess who is still key.
- Have you clearly outlined the new direction and/or mission of the newly created merger?
- Outline, in order, what needs be accomplished in the first year.
- In-house and outside communication systems – what is needed?
- Will the two separate customer bases work in tandem? If you are a niche market product, make sure sure your people are suited to service it.
- Are any new products need to be developed to service your niche?