Definition: The combination of one or more corporations, LLCs, or other business entities into a single business entity; the joining of two or more companies to achieve greater efficiencies of scale and productivity .
Mergers come into play in the world of business for two very different reasons. The first is when you've decided it makes sense to join forces with another company to reap the rewards that come from your combined strengths.
A smart business merger can help you enter a new market, reach more customers, freeze out a competitor or fill a gap in your company's abilities. Mergers can get you on the fast track to become more competitive. With a complementary partner, your business can acquire products, distribution channels, technical knowledge, infrastructure or cash to propel you to a new level of success. The flexibility and power boost they provide can be a key strategic tool for today's entrepreneurs. And the best part is that they can go wherever your ideas take them.
For those business owners who dream of building an even more successful company, merging with another company can present terrific opportunities. The key is doing your homework, knowing what the other business is worth, finding the right company to acquire company, and working with competent professionals (lawyer, accountant, business broker). Ask tough questions and get to know the other company on all levels.
The second reason you'd plan for a merger is when you've decided you want to sell your company and another, existing business decides it would be in its best interest to acquire your firm. As a rule, businesses have deeper pockets and borrowing power than individuals, and they may be willing to pay more than individuals. Businesses also tend to be more savvy buyers than individuals, increasing the chances your business will survive, albeit perhaps as a division or subsidiary of another company. However, businesses can't move as fast as individuals. It may take you a year or more to get your company ready to be merged or acquired. You'll need to:
- Clean up the balance sheet.
- Drop poorly performing products.
- Terminate insider deals, such as property the company is renting from you or family members.
- Trim excessive fringe benefits.
- Make sure you're paid up on all taxes.
- Have at least two years' worth of audited financial statements.
The best candidate for a merger is a company that sees yours as a strategic fit with their own firm. If you have something they want and can't find elsewhere, such as a unique product or distribution channel, they may be willing to pay a premium price. A competitor who only wants to put you out of business is usually a poor merger prospect, however. This buyer is motivated only by price and probably isn't interested in preserving the business.