My business is struggling: should I merge with another?

Most small businesses in the UK operate in a continually marginal state, sometimes making a small profit, sometimes not.  They lack the infrastructure, financial, marketing and other resources necessary to improve their lot.  Many businesses are looking for opportunities to improve their lot through acquisition, merger or just being in the right place at the right time to pick up something cheaply.  This may give you the opportunity to save your business, and with it resolve your financial problems, but how easy is it to achieve?

First off, you have to come to terms with yourself: you will obviously have to compromise your own personal goals if you take the merger route.   Getting over this first hurdle can be as simple as comparing the benefits and drawbacks of merger against the potentially unacceptable high level of risk to you and your family of not doing it.  But merger as with any major deal is a risky business: bringing any two organisations together, in any form, is not easy.  Bringing two underperforming businesses together produces not twice but four times the headache. You have to have the right merger partner.

Some other forms of allegiance are easier to put in place, are less permanent and leave you with more control of your business.  But whichever route you should chose, the negotiations will be long and arduous and at times it will seem as if they can only fail.  Making the decision what to do is only the start of things, there will be had times ahead.

But the greater resources brought about through a merger or other allegiance could significantly improve the results of your business, your family’s finances and your work/life balance and make it all worthwhile.

Set ou below are those circumstances where it may be worthwhile you considering taking the merger route, and summarise some of the other routes that may be available to you.

To understand whether you would benefit from merging, you first need to understand what a meregr is and what are the other options open to you.

What is a merger?

A merger is a full joining together of two or more previously separate businesses.  A true merger in the legal sense occurs when both businesses move their assets and liabilities into a newly created business.  Other alternatives exist, such as where one of the merger partners continue in existence, and through which all subsequent trading is conducted.  A merger is a permanent restructuring of the business with your interest in the existing business being replaced by a share in a combined organisation, in whatever form that may be.

Sale

This is where you sell out to another business.   This can be done through a share sale (where you trade through a limited company) or an asset sale (either for limited companies, sole traders or partnerships).  Your old business entity may or may not continue to exist and you may or may not be left with the job of getting your money out of the old business, depending on the type of sale involved.

A joint venture is where ………

Two or more businesses work together on a specific project under a legally binding agreement, with both parties sharing profits and losses. The venture is for one particular project only, such as on a specific product or area, rather than for a continuing business relationship as in a strategic alliance.

A strategic alliance ………..

Is a partnership with another business in which you combine your efforts involving anything from getting a better price for goods by buying in bulk together to seeking business together with each of you providing part of the product.

The basic idea behind strategic alliances and joint ventures is to minimise risk while maximising your leverage.  Such alliances are typically formed for marketing, sales or distribution, production, design collaboration, technology licensing, and research and development efforts.  Relationships can be vertical between a vendor and a customer, horizontal between vendors, local, or global.  Both strategic alliances and joint ventures are becoming a more and more common tool for expanding the reach of your business without committing yourself to expensive expansions beyond your core business model.

So is merger the best option for me?

A merger could be the right option for you if you are looking for a long term, permanent, solution to your difficulties.  But you do need the time necessary to implement it.   And like everything in life, it takes longer to happen than you could ever envisage in your wildest dreams!  More often then not, the participants in a merger hope for benefits that are immediate and quantifiable.  However, this is not usually the case, at least immediately.   It costs money to merge (lawyers, consultants, moving and other start up costs) and any savings in a merged organisation will quickly be used up by other, largely one-off needs.  Do you have the money to see you through until the benefits are felt?  If not, merger is not an option.  And the merger has to be attractive to the other side: look at things from the other side’s position: ask yourself how ugly is your ‘baby’ of a business?  But beware, no mother really sees her own baby as ugly, be clinical in your assessment by putting your emotions aside.  Would you ‘buy’ this business if you were in their shoes?  If you wouldn’t, then forget merger as an option.

You need to start the merger process when time is not against you.  If you already have huge financial problems you will either not have enough time to complete it or the other side will push you into another form of deal other than merger.  And if you do have huge financial problems, your negotiating power with the other side will be weak, they will exploit it.   Merger partners, like investors or buyers, are only interested in seeing the cash they put into investments be used positively, to drive the business forward.  They will not spend their hard earned cash sorting out your historic debt problems.  Be realistic, if you were them, would you view the other person’s debt problems differently than you do your own?  What would you do if you were them?  For example, would you wait for the business to go belly up and cherry pick the pieces you want, leaving the debts behind?

The primary motivation for most mergers is to increase the value of the combined business by increasing the cash flow of one or both merger partners.  Mergers typically work best where there are opportunities to:

  • Eliminate surplus capacity (production level or in fixed costs);
  • Increase revenue by cross-selling a broader product line;
  • Achieve operating economies (from economies of scale in management, marketing, production, or distribution);
  • Achieving financial economies (including lower transaction costs & better fund raising);
  • Finance investment in new technology in order to maintain competitive advantage;
  • Increase management efficiency (ensuring that the firm’s assets will be more productive after the merger);
  • Increase market power (due to reduced competition);
  • Diversify into other lines of business that promise to stabilise the firms’ earnings;
  • Reduce their involvement in the business.

If any of these situations should apply, then merging could be an option for you.  But, if none apply or are hardly persuasive (and it has to be for both of you), then don’t waste your time trying to merge.

Finally, my own personal observations.  Over the last 20 years I have seen very few mergers of small businesses that are doing badly financially.  The ones that are able to merge have a ‘Unique Selling Point’,  something that really causes them on a trading level to stand out from the rest.  So if you are a small ‘metoo’ business (and in that I mean that you only do the same thing as several others) that is struggling, you can probably forget it as a realistic option.   If this is you, move on quickly and look at other options.

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