Growth Through Merger

When two companies merge together, the new entity they create is innately bigger and stronger. It boasts a new combination of products, people, and processes. It has an expanded presence in multiple markets, a larger customer base, a bigger portfolio of products and services, and more operational complexity. Mergers can be an extremely effective way to grow companies.

However, mergers don’t just help the acquirer grow — targets also grow through this process. Take a look at the ways companies on both sides of the deal can enjoy growth through mergers.

Growth through mergers for acquirers

A quality M&A strategy allows companies without any inherent advantages (other than the development of their acquisition plan) to rise past the competition. When acquirers find targets that expand their potential, they can grow in a variety of lucrative ways, including the following.

Instant access to new markets

Traditionally, entering a new market can take years of networking, pitching, and finetuning your marketing plan. At times, it may be impossible due to oversaturation. But when you acquire a company in a different market, you can ride on their brand reputation and enjoy instant access to that market.

Diversified products and services

Launching new products or services can be risky and time-consuming, but to stay relevant in a changing market, you often need to diversify your product or service portfolio. When you acquire another company, you also acquire their products and services, allowing you to grow your portfolio almost effortlessly.

Through an acquisition, you can gain new products without research or development. Instead, you can jump right into the most lucrative stage of the product life cycle. Similarly, you can gain the talent you need to offer new services without worrying about recruitment or training initiatives.

Expanded intellectual property

Acquisitions aren’t just centered around physical assets. You also acquire the target’s intellectual property such as copyrights, patents, and trademarks. After the acquisition, you can leverage these assets to create new revenue streams.

On the flip side, the business being acquired may not have the resources to turn its ideas into moneymakers. When you’re acquired by another entity, you can leverage their resources to turn copyrights, patents, and trademarks into new products or services. This fuels your growth.

Talent acquisition

An acquisition can help you obtain top talent. But you need to tread carefully to protect this aspect of growth. A strong cultural fit is critical for a successful acquisition. If employees have to deal with unexpected management changes or cultural shifts, they may jump ship. They need to feel respected and valued through the acquisition and post-merger integration.

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Synergistic relationships

Leveraging the synergistic relationship between two businesses can improve performance. Strategic alliances can help both entities boost innovation, reduce costs, and outperform competitors.

For instance, businesses with overlapping supply chains can eliminate redundancies and save money on supply costs. They can also use their increased size to qualify for volume discounts. The synergy helps both of the merged businesses to grow.

Growth through mergers for targets

Growing your business by acquiring another business is a clear growth strategy, but it’s not the only option. Counterintuitively, allowing your business to be acquired can also help it to grow. A merger can help targets to grow in all of the ways noted above, but owners play different roles in this process depending on the structure of the merger deal.

Securing a walk-away deal

The common perception of an acquisition is that a big company cuts a check to a small company, and the owner walks away. If you want to cash out and retire, you need a walk-away deal.

In this case, you should make sure the business can run without you before you put it on the market. Then, when you sell, you can watch the acquirer grow your business, while you enjoy the payout from your years of effort.

Staying on as an advisor

Selling your business doesn’t require you to walk away. You might want to stay on as an advisor or senior executive. By staying with the organization, you reduce operational risks for the buyer by ameliorating post-merger integration issues. You stay on and guide the company’s growth, and your presence helps to sweeten the deal.

Related: M&A Deep Dive: Mergers

Selling to a private equity firm

Private equity firms often purchase businesses and keep the owner and management team in place. With these deals, the owner typically receives a share of the acquisition price, and the private equity firm keeps the remaining amount. The equity firm uses its resources and connections to help the acquired business grow.

Eventually, the equity firm sells the business. At this point, the owner gets back the remaining sales price that was held by the equity firm plus any additional profits created during that relationship. This allows the owner to take a second bite of the apple — by extension, these deals are often more lucrative than walk-away deals, and the owner can be involved in several rounds of acquisitions by multiple equity firms.

Negotiating an earnout

You can also negotiate an earnout. This is a hybrid approach to staying on as an advisor or walking away. With an earnout deal, you accept a sales price, but you also agree to stay with the company for a certain number of years. During that time, you work toward pre-established growth targets. Your earnout is dependent on hitting those targets.

Deciding to merge your company with another entity doesn’t guarantee growth. Many buyers walk away with much less than their businesses are worth or get stuck in drawn-out contracts because they don’t understand the value of their business. They’re romanced by high prices or let “friends” guide them into lackluster deals.

On the other side of the table, buyers may not select the optimal targets, they may overlook details during the due diligence stage, or they may overpay because they’re not using the right metrics during valuation. Whether you’re buying or selling, you need to handle mergers carefully if you want to drive growth.

To navigate this process effectively, you need an advisor who can help guide you through the process. At [insert name of M&A company], we have helped companies on both sides of the table to negotiate the best possible deals to support their growth strategies, and we want to help you. To learn more about growth through mergers, contact us today.

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Matt Lawver

Matt Lawver

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