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A Vertical Merger is One (Fast) Path to Small Business Growth, Part 1

Use a Merger Acquisition Checklist

A vertical merger provides opportunities for improving the supply chain and improving time-to-market. Assessing the real value of merger acquisitions means doing a thorough acquisition accounting.

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Merging vertically can be a strategy successfully used by small business owners to grow business quickly.

This type of merger provides vertical integration.

For example, a book publisher who buys a printer is growing vertically and reducing the business' dependency on its print suppliers. Or a printer who buys a graphic design firm is growing vertically and expanding its ability to provide marketing services to clients.

Merger Acquisitions:

How to decide between a merger or an acquisition?

Use decision making tips and problem solving techniques to assess the pros and cons of either a merger or an acquisition. Build a merger acquisition checklist to ensure that you have reviewed all pros and cons and completed a thorough due diligence. Ensure that you have a strong accounting team to handle the acquisition accounting review that will be necessary.

Assess the positives and negatives from recent mergers and acquisitions in your industry, or related industries. Both will come with challenges: culture, lay-offs, wage parity issues, synergy savings, and more. The potential deal will help the decision; mergers are often defensive in strategy whereas acquisitions are often strategically offensive. Making the right decision will be dependent on the specific circumstances.

Is a Vertical Merger
the Best Fit?

Also consider whether or not opening a small business branch or starting a new business altogether is not a better alternative to merger or acquisition; your own business is grown by you and you do not have to invest as much time or energy in managing change, rather you can invest those resources into the new business.

There are a number of reasons to consider mergers and acquisitions. Some of these reasons are that you want to add a product or service quickly; or open a new branch at minimal cost or time; or combine the sales books of two companies; or combine two organizations to gain significant economies of scale; or one organization has great, and desirable, assets or good cash reserves; or there is a good opportunity that presents itself (be most careful with this reason as sometimes that great opportunity can be a distraction that comes at a high cost), and more.

Successful mergers and acquisitions allow small business owners to plan for growth even in an economic recession. Acquisitions or mergers are a form of inorganic growth that can be costly, particularly if the cost to acquire is high and the benefit is low. There are some specific parameters that will allow you to be more successful in growing through mergers or acquisitions.

Merger Acquisition Checklist:

You will have a higher degree of success with your merger or acquisition if:

  1. The company you are acquiring is smaller; preferably 15% of your size;

  2. You are capable of not only the acquisition or merger, but are also capable of managing change and finding enough tangible synergy to make the deal valuable;

  3. You infrequently acquire another business (in other words, acquisition is not your primary business); you focus on the best opportunities and shop wisely (by doing so you minimize your risk);

  4. You understand why you want to acquire or merge with another company:

    • it fits your strategic direction
    • it allows rapid planned-for growth
    • it allows you to increase your market share
    • it provides you with efficiencies related to economies of scale (from production, inventory, purchasing, sales and marketing, administration perspectives and more);
    • it allows you to rapidly add equipment, people, and customers
    • it allows you to take offensive measures against your competition
    • it allows you to become the market leader (or on the way to becoming a market leader)
    • it allows you to be a pricing leader
    • it allows you savings and synergies
  5. You can clearly define and understand the challenges you face. For example, with a vertical merger your challenge will be to integrate two businesses and cultures, to manage significant change (smaller mergers will be easier), while learning how to manage the new business within the supply chain (or vertical);

  6. Your acquisition is strategic, not simply opportunistic (although sometimes opportunistic acquisitions can prove very successful; however the odds are against you)

    • Do you need the additional capacity the other company brings?
    • Do you need the labor force the other company has?
    • Do you need the equipment the other company has (is the equipment new/old)?
    • Were you planning an expansion, that now could be supported by this acquisition or merger?
    • Is there enough market potential for a combined business - or will the merger or acquisition make you too big in the eyes of your customers and market?
    • Does the other business have customers you don't have?
    • Does the other business provide you with vertical expansion opportunities? For example, if you buy your supplier or distributor, can that help you enter new markets or access new competitors?)

Growth Strategies: Merge or Acquire

Recently in the city where I live (Vancouver, Canada), there was a merger of two venerable companies. One was an institution in the city. With a significant history and lots of brand reputation. It was a shoe repair and shoe making business. The other company was a boot maker, also with a strong identity and an excellent reputation. These two relatively local businesses (though their reputations were large enough that celebrities from across the world bought from them) came together this year. Both were family-held businesses.

The shoe maker wanted to retire and ensure that his business was in the hands of people who could sustain his business. It was a friendly merger and, while mostly a horizontal merger, it did have some elements of a vertical merger (in the repair side of the business). This was a merger that was welcomed by the marketplace as they saw the merger as a way of saving and retaining two well-loved businesses. Both businesses had been friendly with each other before the merger and neither saw the other as a direct competitor.

A vertical merger does not occur as frequently as other mergers or acquisitions but it can have a higher success rate and be a simpler merge or take-over.

You won't receive as many synergies (and therefore likely will not lay-off as many people or be able to cut significant costs) but you need to consider a vertical merger if it will help you to reduce the cost of production and/or increase your efficiency.

Other growth strategies can include buying one (instead of all) location or division of a company; one that fits your operation but is not necessary to the organization you want to buy from. You need to have a good awareness of the business and of the products or services that you want to add through acquisition or merger.

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