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Making a Decision about a Merger or Acquisition: What You Should Consider

merge seignMany times business owners are presented with an opportunity that can be fraught with wrong moves: whether to merge or acquire another business. Sometimes the business is a competitor and merging seems like a great way to boost market share. Other times the acquisition is in a related business, which could lead to certain business leads and synergy.

Are the two entities a good fit? Lululemon wouldn’t make a good partner with Sears. They have different target markets but also they have vastly divergent corporate ethos and management styles.

One of the most difficult aspects of running a business is envisioning what companies would be good candidates for mergers and acquisitions. Yet, this is actually a far better way to go about M&A then simply evaluating a company because it is on the market.

The very best idea would be to have clearly delineated strategic plans and examine any new mergers within that rubric.

Ask yourself about their bottom line. It’s critically important to understand the financial underpinnings of any potential partner or component. This is not as easy as it seems. Expert attorneys and accountants can help you determine not only the earning power of the potential company mate, but also what the expected outlay would have to be to merge, consolidate or expand your operations.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is just one measurement of the health of a company. Do not rely on this one statistic as the sole determinant of your decision.

Don’t overstate the cost savings and underestimate the costs of merging. Often companies get excited over saving money in staff expenses and equipment and this can add up to a lot. But you won’t be able to just halve your staff in one fell swoop and for a period of time, you may be paying for twice as many people as you need. In addition, you will incur other costs for these synergies like severance payments and possible relocation costs for both people and equipment. It is highly likely that there will be up-front expenses prior to any cost savings.

Consider the down-side of merging. Are there any disadvantages to this merger or acquisition? Would you lose any key employees or significant customers? How would this affect your functioning or your bottom line? What difficulties do you anticipate in terms of management, financing of the acquisition, and the continued flow of operations? Are these aforementioned issues ones that can be overcome? All of these issues are called transition risk and should be a large part of your decision, just as significant as the price of the M&A.

Mergers and acquisitions, when conducted thoughtfully, can be a highly effective way to effectuate strategic growth. All companies are advised to consider the many aspects of these transactions before taking any action and to consult attorneys who specialize in mergers and acquisitions before making any decisions.