Businesses merge due to a range of situations. The reasons for merging may be evident for some companies. At the same time, other businesses need a nudge in the right direction. Determining whether your company is ripe for a merger can be challenging.
Making the right choice can set you up for greater overall success, profitability, and expanded brand reach. Once you understand the signs of merger opportunities and reasons for a merger, you can be confident in your decision to move forward.
Do You Need to Merge?
There are merger decision indicators that point to your organization being best served by merging. Knowing when to merge companies can help you make the move in a timely manner. Some of the signs and reasons for a merger include the following:
Economies of Scale
Economies of scale occur when companies can increase production without simultaneously increasing costs. When merging with another business, you share or combine resources, allowing your overall costs to decrease. By sharing administrative functions, facilities, and production networks, your company can realize lower costs and higher profits.
Product or Service Expansion
Sometimes, companies merge with another similar business with additional product or service offerings. A company can attract more customers and reduce risks by expanding to offer additional products or services. Relying on a limited number of products can be risky, leaving the company vulnerable to economic instability.
Expanding may also take a company into new markets or geographic locations, solidifying its lead over the competition.
Brand Image Growth
Brand image is an important component of a business’s growth and success. Through branding, companies can make stronger connections to consumers. A company that needs more exposure or name recognition may consider merging to take advantage of another company’s brand image to expand its reach.
Synergy
Synergy refers to the theory that two companies together can be more productive and profitable than they can be alone. When companies merge, they can utilize each other’s talent pool, increase production, and save money. Consequently, a merger leads to a more competitive and innovative whole.
Different Types of Mergers
What type of merger is right for your business? Let’s take a look at the different types of available:
Product Extension
Companies that work in the same industry may want to explore the benefits of adding a new product to its existing line, creating a larger customer pool.
Conglomerate
When a union of companies conducts activities that increase stakeholders’ profitability, a conglomerate is formed.
Horizontal
Companies that sell similar products or services may want to do a horizontal merger. This expands the market reach and helps reduce competition. For example, a company that sells insurance products may join with a larger insurance organization and successfully take over a large part of the market.
Vertical
In this scenario, two (or more) companies in different supply chain positions join. For example, an HVAC manufacturer may merge with a company that produces its raw materials, allowing them to reduce costs.
Market Extension
A market extension is when two companies in the same industry but with different markets join together.
Merger Considerations and Checklist
As a final step, ensure your decision aligns with the following considerations:
Consider the Costs
Every business decision must be considered in relation to cost factors. Weighing the financial pros and cons will guide you in the right direction. Obtaining a business expands reach, growth, and potential profits quickly. This might be a wise choice for those who want to see quick results.
Don’t Forget the Cultural Aspects
No matter what type you’re contemplating, it is best to keep in mind more than just the money. Company culture is also relevant in deciding if this move is best. The company in question must align with your company’s culture so things will run smoothly. If both companies have goals and missions that are in alignment, then they’re a good cultural fit.
How Will Customers Respond?
You must think about how the customers will respond and whether it will be a positive move in the right direction. Some companies may have a strong, established relationship with customers, and a merger wouldn’t serve them well. Others would do well with a combined customer base.
Negotiate Using Your Strengths
Every organization has its strengths and weaknesses. Learn your company’s strengths and what you bring to the table in a merger. Then, you can negotiate the best deal and/or decisions for the business.
Know Your Goal
When moving forward, you should have a goal or objective in mind. You should know why you are planning this step. Is it to reduce costs, increase profitability, expand your customer base, enhance your brand image, or something else? By knowing your goal, you will be more likely to achieve it.
Engage in Effective Communication
Communication is one of the keys to successful negotiations. You will be asked questions about your business. Additionally, you want to ask questions, too. Ensure the other business is reputable. Be transparent with your answers. Confidence and authenticity are crucial for all parties to have trust.
Know When to Walk Away
Not every opportunity is the right one for your business. If something doesn’t seem right or you’re unhappy with the deal, walk away. You could attempt to resume negotiations after a period, but sometimes, a merger with a particular company is just not the right move.
Learn More from the Experts in Mergers & Acquisitions
Now that you know these insights and the benefits of merging, you can move forward to making the right choice for your business. At Confie, we have a strong record of successful mergers and are positioned to work with your company. Our personal line insurance company is well established. Get in touch with one of our lead experts for more details. Contact us today or call us at (714) 252-2500.
