Owning a business is a major responsibility, but it can be rewarding to watch it grow. In some cases, growth of a business doesn’t follow a solo path. It’s sometimes necessary for two or more companies to become one in order to reach a larger target market and facilitate success.
When businesses join together, this process typically involves a formal merger or acquisition. While these may seem like different words for the same process, there are some big differences between these approaches.
Mergers versus acquisitions
A merger occurs when two companies combine to form a new entity. This includes pooling resources, reducing competition and enhancing market share. Both companies involved in a merger are typically of similar size and mutually agree to unite their operations.
An acquisition involves a larger company purchasing a smaller one, either through a friendly agreement or a hostile takeover. The acquired company ceases to exist as an independent entity and becomes part of the acquiring company.
Purpose of mergers and acquisitions
Mergers and acquisitions are meant to speed up a company’s growth faster than what’s possible if it remains a solo entity. In some cases, they can lead to a reduction in overall operating costs. It can also increase profitability by enabling the company to step into new markets, acquire new technologies and combat other companies that share markets with the company.
It’s possible that mergers and acquisitions can also diversify a company’s portfolio. This can reduce the dependency on one product, service or market. While this might not be immediately profitable, it can mitigate the risks of market volatility.
Protecting businesses during mergers and acquisitions
Due diligence is critical during mergers or acquisitions. Both companies that are merging or the one that’s acquiring another company need to have a comprehensive look at various aspects of the other company. This includes looking at the financial health, potential liabilities, legal standing and operational capabilities. Unearthing issues before the process is complete can prevent future surprises.
Because these are high-value business transactions, proper documentation is critical. Having a legal representative present to assist with paperwork and other facets of the process can help to protect business interests during a merger or acquisition process.