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Merging with or acquiring another business

Acquiring or merging with another business can be a real growth opportunity. Buying another business outright is acquiring. A merger happens when two or more businesses join forces to operate all services under a company name. Both options can be a faster way to grow business, but there are some things to watch out for as well:

A Good Target
If another business sells or provides complementary products or services and is not performing to its full potential, is often considered a good target. Lack of performance may be due to poor management or the need for investment, or the need for relocation. Use due diligence (see below) to uncover any discrepancies the current owner may not have volunteered. Try to understand the owners' motives in wanting to sell or merge. Such businesses can often be acquired or merged for less money.

A Bad Target
Is one where the business is performing well, has active customers, and is financially solvent. Probably will be expensive to acquire, and may not consider a merger an advantage to them. Can your business offer anything they aren't already doing themselves?

Merging with or acquiring another business brings has advantages and challenges.

Advantages
  • Quality staff or additional skills not present in your current workforce may be gained
  • Additional knowledge of your industry or sector
  • Business intelligence may add to current experiences and knowledge
  • Access to assets for new product and business development
  • Gain a wider customer base, therefore increasing market share
  • Diversification of the products, services and long term prospects of the business
  • Possibly reduce costs and overheads
  • Reduce competition
Challenges
  • New management structure may not suit
  • Exit plan for the previous owner could be tricky (in an acquisition)
  • Maintaining business' performance whilst time and energy is expended on a potential deal
  • Reaching agreement on which systems and processes to integrate
  • Reaching agreement on whose system or process will be maintained for those not being integrated
  • Managing pay and conditions differentials between the two groups of staff
  • Integration processes can meet with some resistance.
  • Building a working relationship with, and encourage knowledge sharing, amongst staff who may have different methods to others
Impact on staff
Mergers or acquisitions usually create an air of uncertainty and change. Staff often see this as a threat to their position. Morale can drop in the process, so be sure to keep everyone full informed as rumors can be damaging. With regular and open communication, you are reassuring staff they are valued and needed. Identify who key staff are and work hard to keep them informed and involved. They can then pass on the correct information to other employees in their section. This could be achieved via special communication, over and above that received by regular staff, inclusion in the due diligence process, or incentivising them with a scheme running beyond the expected date of any deal being struck. If the process is for acquirement be sure to identify key staff in the other business and bring teams together as soon as possible. A change management professional can act as an adviser to the management team and/or as a communication and support mechanism for employees. Often a good option in larger businesses.

Certain obligations arise as an employer regarding communication and consultation with staff. See the Information and Consultation of Employees (ICE) Regulations. You need to be aware of these regulations if you employ more than 150 employees. The regulations cover business with more than 100 employees as of April 2007, and 50 employees from April 2008.

ACAS improves organizations, and working life, through better employment relations achieved via up-to-date information and independent advice. It has information on its website related to information and consultation with employees.

Ask the experts
Engage expert advice at an early stage in the thought process, certainly before any potential target companies are identified or approached. Be sure to get clear terms of reference, and understand the charging and fee structure. Your advisers will need to work as a coordinated team. Be confident they are able to work together and that agreement can be met about who is coordinator and project manager.

Accountant
The accountant will give advice on:
  • Business rationale
  • The target merger/take-over selection
  • The final decision making process
  • All financial forecasting as
  • Advice on financing the deal
  • Make necessary arrangements.
Solicitor
Your solicitor will give advice on, and perform:
  • All legal processes
  • Review content and adequacy of warranties and indemnities, and undertaking due diligence.
Warranty--A written statement from the seller confirming a key fact about the business. Warranties should be provided for assets, order book, debtors and creditors, employees, legal claims and year-end accounts.

Indemnity--A commitment from the seller to reimburse in full, in certain situations. For example unreported tax or other liabilities.

Due Diligence - Verification process that vendors claims are correct. If properly undertaken the due diligence process will:
  • Ascertain ownership of key assets such as property, equipment, intellectual property, copyright and patents.
  • Quantify all liabilities
  • Obtain details of any past, current or pending legal cases.
  • Establish the business' contractual obligations with its employees (including pension obligations), customers, and suppliers. Consideration of the impact on these contracts of a change in ownership will be made.
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