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What Is a Merger?

  Making referrals, subcontracting work, or entering into joint ventures are all temporary, short-term approaches to expanding your business. A merger is a permanent, long-term approach. Like hiring employees, merging with another business results in a major change in the way you do things. Instead of making decisions on your own with little or no input from others, you will have to learn to involve others in your decision-making process. Can you make the transition from performing solo to working with others as part of a team?

If you have any reservations about whether or not merger is right for you and your business, hold off on pursuing a merger. Mergers may appear attractive approaches to expanding your ability to serve customers, but they are not always easy to put together and are always very difficult to

undo. Instead of a merger, you might consider subcontracting work or developing a joint venture to serve your customers better. Each is a short-term solution with virtually no permanent impact on your business.

Purchase Another Business and Combine It with Yours

The factors addressed in Chapter 4 regarding purchasing a business are equally applicable whether you plan to purchase a business to run yourself or to merge the business with

the one that you are already running. Exercise the same care in purchasing a business to merge with yours as you would in purchasing a business to run on your own.

Its Ability to Look After Customers

  You can use this ability to extend the goods or services that you deliver to your existing customers. This is possible only if the other business has some excess or unused ability to look after customers. If the business is struggling to keep up with its customers’ demands, there is no reason to believe that after the merger, its resources will be able to serve your customers as well. As you investigate the other business, make sure that it does in fact have excess capacity that can be used to extend the goods and services that you provide to your customers.

An Established Customer Base

Ideally, these existing customers will continue to deal with you after you have purchased the business and integrated its operations into your own. In this case, these customers represent new customers for your existing goods and services. It

is difficult to assess how many of a business’s existing customers will continue to deal with you as the purchaser. They are more likely to continue to deal with you if there is no disruption in how their needs and wants are met. Thus, it is important for you to continue to serve these customers as well as, or preferably better than, the business that you are purchasing has served them. In investigating a business for possible purchase, ensure that you can duplicate, if not improve upon, its standard of customer service.

Merge with Another Business, or 1 1 ₃ 1

 The traditional approach to merger involves combining two active businesses into a new one. Although it contains elements of each of its component businesses, which no longer exist as separate entities, the new business is a distinct entity. Simple as the concept appears to be, it is not always easy in practice.

A partnership of novice business people is like a marriage of young people. In each case, the partners are relatively inexperienced in life, but nonetheless confident of their future together. Their lack of experience allows them to be more flexible and receptive to new ways of doing things. In developing their relationship, the parties are usually willing to accommodate each other.

A merger or partnership of existing businesses, on the other hand, is like the marriage of two older, more world-weary people. They have seen too much, probably been hurt too many times, and tend to be somewhat cynical. Instead of being flexible and open-minded, they are more likely to want to do things the way they have always done them. Given

their experience, both good and bad, it is often difficult for these parties to modify the way they think and act. It is this experience of each individual business and its owner that makes mergers so difficult to bring about.

As in finding the perfect marriage partner, it is difficult to find the ideal merger partner. And as in successful marriages, it is necessary to be flexible and make compromises, something that independent-minded business people cannot always do. Perhaps that explains why fewer than half of the mergers that are created remain successful over the long term.

 If you are looking for a business to buy, you could retain a real estate agent or business broker, who might know of businesses that are for sale. Also, owners trying to sell their businesses might be interested in merger proposals. As another alternative, you could advertise for businesses to purchase or potential merger partners.   

Potential Merger Partners

You locate potential merger partners the same way you locate other businesses for referrals, subcontract work, or joint ventures. Draw on your network of business contacts for help in locating suitable merger candidates.

The same kinds of businesses that would be suitable candidates for joint ventures would also be suitable candidates as merger partners. The difference, of course, is that joint ventures are normally limited in scope and in time, whereas mergers are limitless. It is one thing to enjoy the company of another individual on a single date; it is quite another to commit to that person for the rest of your life. Use as much, or even more, care in selecting a merger partner as you would in selecting a life partner. A messy divorce to wind up a bad marriage is a summer picnic compared with the nightmare of trying to undo a bad merger.

3. Can you subcontract what your customers need or want? If yes, what would pre-vent you from subcontracting it?

4. Can you enter into a joint venture to help your customers? If yes, what would prevent you from entering into a joint venture?

If, after considering the alternatives, you believe that merger is the best approach to expanding your ability to serve your customers, the next step is to satisfy yourself that merger is the right approach for you. The following questions will help.

1. Do you want to use your customers’ requests as an opportunity to expand your business? If not, review Questions 1 to 4 above to find a better alternative.

2. What is the best approach to expand your business? Hiring employees? Why or why not? Merger? Why or why not? If you selected hiring employees, review Chapter 22. If you selected merger, go to Question 3.

3. How do you see your business operating three years after the merger? What goods and services do you provide? Who are your customers? What do you do?

Hot Tip

  If you can’t negotiate your own merger agreement, it is unlikely that you will be able to effectively work together. Once you have agreed to the terms of your merger, have a lawyer prepare an agreement to ensure that all relevant issues are covered and that the agreement is enforceable. Make sure that the lawyers do not renegotiate the terms upon which you and your partner have already agreed. Lawyers sell their time and like to sell as much of it as they can, even if their clients don’t always need all of the services.

What Each Partner Brings to the Merger

Each partner brings two kinds of items to a merger: financial statement items and non-financial statement items.

In preparing for merger discussions, it is helpful to list all of these things in as much detail as possible. This allows each partner to assess the other’s strengths and weaknesses. The table below details items commonly found on financial statements and outlines the relevance of each to merger discussions.

Financial Statement Items

Assets and liabilities that are not formally recorded anywhere are strengths and weaknesses that are unique to you and your business. They are the intangible factors that give your business its distinctive character. They will also be important factors in the new business that develops as a result of the merger.

Non-Financial Statement Items

A Merger Checklist

Once you and your potential merger partner have identified what each of you can contribute to the merger, you can then negotiate the terms of the merger. Below is a checklist of items to be discussed when negotiating your merger. Apart from the first item, it is not necessary to address the issues in the order in which they are set out. It would be better to tackle the most difficult issues first. This will allow you to deal more effectively with those important issues at the beginning of the discussions when you are fresh and interested rather than toward the end when you will likely just want to end the discussion as soon as possible. The easier issues will normally take care of themselves once the more difficult matters have been resolved. Isn’t that how your teachers told you to handle your homework assignments?