One of the best ways to grow rapidly, is by strategically doing a business merger or acquisition with another company. You might be able to significantly boost revenue, literally overnight, by acquiring another business. In contrast, achieving a comparable rate of growth organically can take years. By organically, we mean increasing sales of existing products and services or adding new product and service lines.
There are, of course, multiple factors to consider before making such a move. But your primary evaluative objective is to weigh the potential advantages against the risks.
On the plus side, an acquisition might enable your company into implementing a business expansion strategy. This includes new geographic areas and new customer segments more quickly and easily. You can do this one of two ways. The first approach would be through a horizontal acquisition. The horizontal method acquires another company that’s similar to yours. The second approach would be through a vertical acquisition. The horizontal method acquires another company along your supply chain.
There are also some potential drawbacks to completing a business merger or acquisition. It’s a costly process from both financial and time-commitment perspectives. In a worst-case scenario, an ill-advised merger or acquisition could spell doom for a business. This negative result would be due to the business overextending itself financially or overreaching its functional capabilities.
Thus, your company will need to go through a thorough organizational strategic planning process. You should determine how much the transaction will cost and how it will be financed before beginning the M&A process. Also try to get an idea of how much time you and your key managers will have to spend on tasks relating to the M&A in the coming months. Dig deeper, and see how can this M&A impact your existing operations.
You’ll also want to ensure that the cultures of the two merging businesses will be compatible. Mismatched corporate cultures have been the main cause of numerous failed mergers, including some high-profile megamergers. You’ll need to plan carefully for how two divergent cultures will be blended together.
The best way to reduce the risk involved in buying another business is to perform solid due diligence on your acquisition target. Your objective should be to confirm the claims made by the seller about the company. This includes the company’s financial condition, clients, contracts, employees and management team.
The most important step in M&A due diligence is a careful examination of the company’s financial statements — specifically, the income statement, cash flow statement and balance sheet. Also scrutinize the existing client base and client contracts (if any exist) because projected future earnings and cash flow will largely hinge on these.
Finally, try to get a good feel for the knowledge, skills and experience possessed by the company’s employees and key managers. In some circumstances, you might consider offering key executives ownership shares if they’ll commit to staying with the company for a certain length of time after the merger.
Deciding to pursue a business merger or acquisition with another company is rarely an easy one. Our CPA firm can help you perform the financial analyses and project the tax implications of any prospective deal to bring the idea better into focus.