If you’re a small business owner or an aspiring entrepreneur, mergers and acquisitions probably sound like something that happens at an entirely different operational level from the one where you live and work. But if you’ve put the time into creating a business plan and invested hours in the health and welfare of your business, then it’s more than worth your while to learn the basics – it may even be the difference between your business’ success and its failure.
The reason for this is simple. No matter what size your business, there are situations surrounding you that can impact profitability. Competition may arise, trends and consumer preferences shift, technology changes – all can lead to the need to merge, buy, or sell a business. Getting familiar with the terms and what types of scenarios may give rise to them is a smart step.
The first thing you need to understand is that mergers and acquisitions are terms that can cover many different types of events involving businesses large and small, local or international, with their commonality being that the purpose of all of them is to change a business organization in order to improve its operations, its relevance, and its revenues. The more you know about the different merger and acquisition options available, the better equipped you will be to make important decisions that will impact your ability to act in the best interest of the company you’ve already put so much of yourself into.
What is a Merger?
When two (or more) companies decide to merge, it means that they are joining their organizations together to take advantage of each of their strengths and minimize each of their weaknesses. A merger does not create an entirely new entity. In most cases the merging businesses start out as roughly the same size. Market share expands for all involved while the cost of operations diminishes, and in many cases the merging companies are able to use their combined strength and goodwill to diminish the strength of businesses both have viewed as their competition. For a merger to take place, each involved company needs the approval of its shareholders and board of directors.
What is an Acquisition?
Where a merger combines two or more companies to create a new one, in an acquisition one company buys the other and absorbs it into its operations. The acquiring business is generally the one that is more profitable, and it continues to operate as it originally did, but with the additional control of the company that it has purchased. If the entire company is purchased, then the acquired company stops existing, while if only a portion of the company is purchased, the remainder will be unaffected.
What is Consolidation?
A consolidation is similar to a merger, but instead of the merged entities becoming part of an existing entity, the combination of assets, inventory, skills and customer base create an entirely new entity where organizations that had previously competed against one another become a single collaborative organization.
When Should You Consider a Merger or Acquisition?
You may never need to consider a merger and/or acquisition for your business, but if you encounter any of the following types of situations, it may be something that worth entertaining.
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