When we hear “merger and acquisition,” we typically think of a business being bought by a bigger corporation so that both companies can grow. In essence, that’s what it truly is; a strategy used to develop a small business and change its management.
But though similar in meanings, mergers and acquisitions have significant differences. On the one hand, a merger refers to the combination of two businesses so that it would become a single new entity. On the other hand, the acquisition also means combining two companies, but not to turn them into a new entity. Instead, the other business will get fully absorbed by the buying business.
So, which one is better for your small business? How should you prepare for either?
Merger Vs. Acquisition
Let’s further detail the differences between a merger and an acquisition:
A merger legally requires two companies to consolidate into a new entity. That results in new management and structure, with key people from both organizations taking charge. A more common distinction between a merger and acquisition is to tell whether the deal is friendly, which makes it a merger, or hostile, which makes it an acquisition.
Friendly mergers do not occur frequently. It’s uncommon for two CEOs to sacrifice an extent of authority to benefit from the merger. When they do, they have to surrender their shares in the company to make way for the issuance of new stocks, which will be under the new company’s name.
Mergers are typically done to decrease operational costs, expand into new markets, and maximize revenue and profits. It is usually a voluntary act between two businesses of the same size and scope.
An acquisition is when a small business becomes part of a bigger company. They do not merge, because the small business will cease to exist, while the bigger company that bought them will remain as they are.
Hence, acquisitions are also called “takeovers.” They’re generally viewed in a negative light, so some acquisitions are called mergers, even though it isn’t the case.
Companies usually acquire a small business to obtain their technology, sparing them from years of capital investments and research and development.
Preparing Your Business
The first step to preparing your business for a merger or acquisition is obtaining a business valuation. That analyzes your sales, earnings, net book value, fair market replacement value, the overall industry, and market outlooks, etc. It will also examine your intangible assets, which include the worth of your brand and reputation.
Next, prepare all your financial statements. A CPA should do this, but if you already have existing financial statements, consider upgrading them into a review, then into an audit. If you have inventory, hire an accounting firm to perform a thorough inventory review for you.
In addition to your financial statements, you also need to prepare a quality of earnings report. Potential buyers will determine the financial strength of your business through this report. And for your part, the information will let you understand your position in negotiations better.
If you’re going to sell your business, work with financial advisors to ensure that you’ll receive maximum returns. They should also review the tax efficiency of your current business structure.
Most importantly, hire a corporate lawyer to team up with your CPA team. Consulting with an investment advisor is optional, especially if you need additional insight into your financial strategy.
After the merger or acquisition, you’ll undergo a merger and acquisition integration process. That refers to the combination of the operations and systems of your business and the acquirer’s. It lets the acquirer gain the benefits of the acquisition as early as possible.
In a sentimental sense, merger and acquisition can make you feel like you’ve lost something significant. But it’s a better option than closing your business and letting it be forgotten in time.