Six Reasons Why a Small Company Should Consider a Merger
One of the key themes I stress when teaching Organizational Finance courses at the local university is the importance of making strategic decisions to maximize the owner’s value in the company. Too often, small and medium-sized companies are too busy focusing their intention on near-term earnings rather than maximizing long-term owner value for the future. One of the most underrated tools to maximize long-term owner value in an organization is a merger and/or acquisition (“M&A”). Whereas an M&A can create or destroy short-term value in a company faster than any other corporate activity, a properly executed M&A transaction can be the most rapid way to improve a company’s competitive position, expand its operations, increaselong-term profitability, and/orprovide a company with valuable technology.
That’s why, in the right circumstances, I often encourage small and medium-sized businesses to consider M&A. Usually the biggest barrier to an M&A transaction is the belief that M&A is for bigger companies with more resources. However, small and medium-sized businesses are also reaping the many benefits of M&A, namely increasing owner value over the long-term. While this strategy is not for every small to medium-sized business, below I’ve listed some of the top reasons your business should consider an M&A.
1. Capital, Cash and Credit. Small to medium-sized businesses typically have a harder time obtaining lines of credit and loans from banking institutions. An M&A may provide your business with needed access to capital, cash, and/or credit. If an M&A is done right, over the long-term your company will increase its revenue, reduce overhead and redundancies, enable your company to attract more capital and ultimately increase the value of the owner’s equity in your company.
2. Reduce Overhead and Expenses. An M&A can also help your company reduce many of its expenses. Budgets for things like marketing might be trimmed, while the new, larger company will enjoy greater purchasing power, which lowers the costs of raw materials and other necessities. More often than not, an M&A can also share office space and eliminate duplicate facilities.
3. Customers. Sometimes an M&A can provide your business access to valuable customer lists. If you can increase your customers and find a way to increase customer service offerings, provide better pricing, create innovative products and improve the overall customer experience, then your M&A makes sense.
4. Management talent and experts. M&A’s also present the opportunity to team up with experts who bring their vision, management and technical know-how to the table. The ability to leverage management capabilities is a skill and an asset. The merged company can make use of the very best minds from both companies and make up for shortfalls in the individual company’s skill-sets. In addition, obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence is a great benefit for any company.
5. New markets. Merging with another company also provides the opportunity to increase market share and expand into new geographies and sectors. By merging, the new company is theoretically provided with access to more customers. This is true if the individual companies had been demonstrably successful in separate markets, as opposed to roughly equally competing in the same one.
6. Product development. Mergingor acquiring another company can create innovation in manufacturing, distribution, design and research and development for your company. Merged companies can offer a greater range of products and services. Because these may be complimentary, the merged company may be able to capture more consumers than they would as individual entities.
Although merging with or acquiring another company is a valuable option to maximize owner value in the company over the long-term, the process for small to medium-sized businesses is just as difficult as managing the union of larger companies. Merging results in the combination of assets and liabilities, so the due diligence process is complex and getting right is important. If you think an M&A is right for your small to medium-sized business, be sure to hire a good consultant to help you with the process.
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