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Business owners may be intimidated by the terms “merger” or “acquisition,” and with good reason; both words carry an aggressive connotation, especially to an owner who is emotionally invested in his or her business. A merger occurs when two companies of similar size join to become one business under the same owner and operator. A business owner’s apprehension about a merger is best quelled when the new partner is extremely trustworthy, or when the promise of financial gain is so great that partnering is worth any risk.
The reasons for merging, while varied, are always financially motivated in some way. The benefits of mergers, however, are more eclectic. True, each benefit can eventually be traced to a financial gain, but on their face, some of the benefits present sooner than others.
1. Better Assets
It is often less expensive to buy better distribution facilities and more productive workers than it is to build/hire them. Joining with a similar business that has a large unused capacity is a very smart business decision.
2. Economies of Scale
When two smaller companies merge to become one larger company, suddenly a whole new world of possibilities is open because of the new size of the company. Raw materials may be purchased on a larger scale (typically at a discount because of purchasing in bulk); better interest rates will be offered by financial institutions; fixed technical costs are reduced because they are spread over a larger base; one efficient management team can run what was once organized by two management teams.
3. Competitive Presence
A merger may either bring together two competitors in the same field, thereby eliminating the competition as it were, or a merger may also bring together two small, unintimidating companies to create one company that is large enough to be worthy of new attention. A larger company will also have the ability to provide goods and services at more competitive prices.
4. Resuscitation of an Industry
If two small companies in the same field are struggling to stay afloat, especially because they are distracted by their competition with each other, a merger of these two businesses will create one stronger business that may now focus on marketing and promotion to generate renewed customer interest.
5. Greater Financial Resources
Once merged, the two businesses will have combined financial assets, which will increase the company’s credit-worthiness, not to mention its bargaining power to obtain loans. Redundancies will also be reduced, making more financial resources available.
In Part 2 of this series, we will continue to explore the benefits of merging two companies. If you are entertaining the possibility of merging with another business, contact us confidentially at George & Company. We would be happy to help you through the entire merger or acquisition process, from start to finish.