Points to consider when a merger is proposed to your firm. Mergers usually take place when a growing organization seeks to diversify their offerings or wish to solidify their market position.
- An experienced industry specialist to negotiate the best deal possible
- Improve the value and marketability of your firm
- Tap into a network to manage the sale process
- Finance your start up or explore an acquisition
If your organization has been approached by another firm, it is never wise to accept or decline the proposal without due consideration. Successful mergers can result in a new entity that is more efficient and that offers better value to their clients. They can bring new markets and growth opportunities and, ideally, increased profitability.
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A merger can be considered like a marriage. Being approached about a possible merger should not result in a rush to the altar. Both organizations should carefully consider their areas of compatibility and see if there are weaknesses that will be compounded through a union. Both organizations should also look at other possible merger partners to ensure that if the union is going to take place, that there isn’t a better mate out there! There is no failure in deciding not to go forward with a merger. The mere exercise of examining strengths, weaknesses, culture and balance sheets alone can lead to new insights and increased performance.
Do be aware that it may not be all roses. The process can take a lot of time and resources and may have an impact, emotionally and psychologically, on employees involved in the exercise. Even if the plan is for the merger to result in a growth business and possible new hires, staff will always have concern about the ‘what-ifs’ for their own position. For this reason, it is advisable to limit the number of staff members engaged in early discussions and analysis. Most, if not all, professional service organizations will appreciate the need for confidentiality within the organizations and within the market.
Deciding to merge
There are some businesses that operate at a small, local level for decades and do so relatively happily. Many organizations, however, keep an eye out for growth opportunities and increased profits. Mergers allow for rapid growth and there should be cost savings through alignment of resources in the short term and improved market visibility in the medium to long term. A larger organization may also attract larger clients, who can now be convinced that the operation has the expertise over a broader range of practice specializations.
A merger may eventually lead to improved financial balance sheets but in the short term, there are often a large number of one-time expenses that make a merger an expensive proposition. Legal fees, consulting fees, real estate fees (as one or both pre-existing offices may become redundant and new, joint space made available.) There may also be expenses in standardizing technology, letterhead and other operational necessities.
Deciding it just won’t work
If discussions show that a merger will not be viable, there still may be findings from the process that will help grow the business. If discussions highlighted a particular specialty that your firm does not have, it may be worth making a hire and bringing a single person, or small team of people, in to provide that specialty offering to your existing and potential client base. This usually will not disturb the existing organizational culture, as new hires can be vetted to ensure the best possible compatibility.
There may also be room to create a relationship, but not a full partnership, with a firm with a complementary service offering or that offers the same service in a different geographic location. These can be loose agreements where both organizations agree to refer appropriate clients to the other or they could be more formal arrangements where there is some profit sharing or teams align to seek out new business for both firms.
Risk factors for a merger failure
A company’s culture is the sum of many parts. One organization may prefer causal chats in the hallway while the other calls meetings on a regular basis to discuss general market development. One organization may be a collection of specialists while the other is a collection of generalists. Two organizations that look good on paper may not work well in practical terms. Arcus recommends that the merger consideration team very closely look at how each organization operates on a day to day basis. How many internal meetings are held on average? Are employees more likely to consult with their peers in person, by phone or through electronic communication? Does one organization adhere to 9 to 5 in the office with additional work done from home while the other rewards those who come in early and stay late?
2. Executive Leadership
Senior executives at both organizations need to be evaluated in terms of strengths and weaknesses and appropriately deployed. Problems will arise if both firms have very strong leaders who do not have sufficient scope in the new organization. Similarly, if there are weaknesses in leadership at both organizations, the merger is unlikely to inspire them to address their failings – it will just give them more people to criticize or blame when difficulties arise.
Failure to plan out the strategy and expected performance of the new organization will almost guarantee a disaster. The new firm must have a strategic plan in place. This plan should not conclude that both organizations will retain all existing clients. Some may choose to leave and other clients may need to leave as there could be a conflict of interest in the new firm serving two competing entities. Compensation needs to be considered, particularly if there is an imbalance between the two organizations in how people of comparable experience and title are paid. Benefit plans may be different – all general firm policies need to be examined as well as mapping out a pro forma budget showing the financial impact of the merger.
How Arcus can help you
Arcus Equity specializes in mergers, acquisitions, financing and operations of companies that provide products, services, and solutions in diverse industries. We offer in-house expertise and flexible financing and acquisition solutions to clients.
Arcus’s network can provide you with access to the expertise you will need to orchestrate a strategy for ideal results. If you’re thinking about selling your business, acquire or finance a venture, it’s important to make the right choices that protect the value of your investments. You might need to locate a strategic buyer, pass the company to your family or management, or even go public.
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Our Mergers and Acquisitions Consulting Services:
Sales & Divestitures: The decision to exit your business involves analyzing your financial goals, assessing various ownership options, and preserving the value of your investment in your business. AG will support your exit with strategic buyers and resources that can provide business sale, merger, acquisition, and recapitalization services.
Recapitalization services: Stabilize your company’s capital structure or improve its stock position with the help of recapitalization experts. These corporate finance and investment bankers, introduced by the AG Network, can help you borrow more effectively, leverage return on investment and boost shareholder value.
Acquisition screening: Identifying a strategic fit requires diligent research and a clearly articulated acquisition strategy. The approach needs to compliment the company growth strategy. In its M&A strategy, our approach is to first define a strategy for growth and to identify gaps within the growth strategy. It is only after due diligence at this step do we start a focused search to identify the right targets. Our process includes:
- Generate a robust list of targets
- Screen targets based on a long term strategy
- Develop a valuation for priority targets
- Build a timeline and map for completion of the acquisition
Planning a business sale
Contact us to find out more about our work in this capability area.