Almost no small business owner builds their company with the goal of merging with another, but when it’s a good fit, this type of transaction can boost growth. Mergers are distinct from sales and acquisitions, though the terms are often used interchangeably.
A merger is when two companies form a new entity with one combined stock. Typically, both original companies retain some percentage of ownership in the new company. The exact share exchange ratio can vary based on the merger terms.
When a business merges, the two companies can gain access to each other’s customer base and production facilities, reducing costs and increasing profits. Mergers can also be a lifeline for struggling businesses, allowing them to stay open and avoid bankruptcy.
While many people associate business mergers with a hostile takeover, this type of transaction can be very friendly and is a way for companies to grow together in an organic manner. In fact, most mergers are completed with the blessing of the target company’s management team.
If the two companies’ shareholders agree to a merge, professional advisors from each firm will analyze each other’s financial data and perform due diligence. The consultants will look at each other’s income statements, balance sheets, cash flow, intellectual property, pending lawsuits and more. They will use a variety of valuation methodologies, including comparable company analysis and discounted cash flow (DCF), to determine each company’s value. Once the companies have agreed to a merger, they will work on integrating their operations, IT systems and human resources.