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Growing a business

Merger and Acquisition Strategies for Business Growth

Mergers and acquisitions (M&As) can be a great way to grow a company quickly and efficiently, but they can also be risky. This type of business growth focuses on expansion through consolidation. Companies can use several merger and acquisition strategies to maximize the benefits and minimize the risks of M&A growth.

What is a Merger? 

A merger is a type of business growth in which two companies join together to form a new, larger company. A company merger takes two companies and combines them to create a single business entity. Merged businesses tend to cover adjacent markets or offer a competitive advantage over other industry-related companies.

What is Acquisition? 

A business acquisition merges two companies or businesses, with one dominant company taking over another. In business, acquisitions are often used to gain market share, add to a product line, scale business operations quickly, or expand into new areas. 

An acquisition can be made either through a hostile takeover, where the acquiring company buys out the target company without its consent, or a friendly takeover, where the target company agrees to be acquired 

What is Growth Through Mergers and Acquisitions? 

A number of considerations go into choosing the acquiring company, including the financials of the two companies, the complementary nature of their businesses, and the fit between their cultures. Once the acquiring company has been chosen, the next step is to negotiate the terms of the merger or acquisition. This includes negotiating the price of the deal and any other terms and conditions that need to be agreed upon.

That being said, many small to medium businesses aren't in a position to overtake another company and consolidate their operations into one using private equity or invested capital. Typically, if a small business is a part of M&A growth, they are absorbed into the larger company. 

However, business mergers and acquisitions can be a great way to grow a company quickly and efficiently if you have the resources to consolidate two operations into one. Companies can use various merger and acquisition strategies to maximize the benefits and minimize the risks of M&A growth.

When Does M&A Work as a Growth and Business Strategy? 

The first step in any M&A growth strategy is to do your research. You need to know as much as possible about the companies involved in the merger or acquisition and the industry in which they operate. This includes understanding the companies' financials, competitive landscape, and key strengths and weaknesses.

Once you understand the companies and the industry, you can develop a growth strategy for the merger or acquisition. One of the most critical aspects of this strategy is deciding which company will be the "acquiring" company and which will be the "target" company. The acquiring company is the one that will take over the target company, and it is usually the larger of the two companies.

Such industry and business research should uncover why a merger and acquisition strategy will work between two companies. Generally, in cases where M&A strategies facilitate a smooth transition and powerful coupling between the core business and another is when a business acquisition or business merger:

  • Fills in gaps for service offerings or customer lists
  • Creates a new stream of acquiring talent
  • Promotes large scalability in a limited time
  • Increases operating cash flow 
  • It offers an easier way to enter new and geographic markets
  • Reduces price competition in the industry 
  • Utilizes the same distribution network 
  • Combines intellectual property and consolidates resources 
  • Provides the ability to dominate the current market
  • It offers greater value creation for shareholders and the stock market 

Pitfalls of a Business Acquisition or Merger

Deloitte's report on mergers and acquisitions took an in-depth look at almost 400 merger and acquisition transactions in the early 2000s. From this research, Deloitte determined that 27% were high-performing growth deals, 45% were medium-performing growth deals, and 28% were low-performing deals. 

Many M&A deals failed to achieve the business merger or acquisition's growth goals. These numbers illustrate that it is much harder to create a cohesive unification between businesses as a means for company growth. Therefore, businesses should be wary about using this growth strategy unless they have identified all risks and have a mitigation plan to offset them. 

Such risks associated with merging and acquisition growth strategies include: 

  • Clash in office culture: Companies often have different office cultures, leading to tension and conflict within the new organization after a merger or acquisition. This can interfere with the efficient operation of the business and reduce its growth potential.
  • Inability to integrate operations: Mergers and acquisitions can also fail due to the failure of the two companies to integrate their processes successfully. This can lead to inefficiencies and higher costs, ultimately affecting profits and growth.
  • Over-leveraging: Merging or acquiring another company can often lead to the new organization being over-leveraged, meaning it has too much debt relative to its equity. This can put the business at risk of defaulting on its debt payments if profits decline.
  • Implementation of internal processes: The development of internal processes becomes a key factor in determining the new organization's success. If the new company does not develop efficient and effective processes, it will likely struggle to operate smoothly and may not be able to achieve its growth potential.
  • Marketplace confusion: If customers are confused about the new company, its products, or its services, it can negatively impact growth. Additionally, if the new company does not have a clear and concise marketing strategy, it may struggle to reach its target market and generate sales.
  • Senior-level distraction: When a company is in the middle of a merger or an acquisition, the senior-level executives can often become distracted by the process and lose focus on their day-to-day duties. This can lead to operational problems and hinder the growth of the business. Such issues can also cause problems with communication and decision-making, which can further delay or disrupt the merging or acquisition process.
  • Decrease in brand strength: One of the risks associated with merging or acquiring another company is that the brand strength of the new organization can decrease. Customers who are not familiar with the new company or its products may be less likely to do business with it. Therefore, developing a solid marketing strategy and identifying these issues can help your business keep the decrease in brand strength to a minimum. 
  • Employee confusion and redundancy: Constructing an organizational breakdown structure can help with this matter. Outlining the new chain of command, who is responsible for what duties, and who manages who will provide a detailed understanding of the new organization's management and employee structure.  

Thus, it is crucial for businesses to carefully consider all risks associated with merging and acquiring another company before proceeding. While there can be benefits to such growth strategies, companies must be aware of the potential risks and challenges they may face.

8 Merger and Acquisition Strategies 

Merging and acquisition growth can be a robust method of expansion when done right. For businesses to hit the ground running after absorbing an acquired company into their operations, they will need various strategies to help them transition. M&A finance can be volatile in the first few months of the new business model, so it's essential to implement such a strategy from the outset of the merger.

1. Do your due diligence

First and foremost, business owners must do their due diligence when researching the compatibility of a business merger or acquisition of their target companies. Such due diligence includes analyzing the two companies' compatibility and the new organization's financial stability. At the same time, business owners should also assess the merger's or acquisition's risks and potential benefits. 

By doing their due diligence, business owners can help ensure that the merger or acquisition is successful.

2. Focus on integration 

One way to help mitigate the risks associated with merging or acquiring another company is to focus on integration. Ensuring that the two companies' processes are integrated before the merger or acquisition is completed can help make the transition smoother and reduce the likelihood of problems arising. Additionally, focusing on integration can help ensure that the new company can operate efficiently and effectively from the outset.

Therefore, a business should establish an integration strategy before the deal is finalized. This plan should outline the goals of the merger or acquisition and how the two companies will be integrated. Having a plan in place can help ensure that the process goes as smoothly as possible and that all parties know their responsibilities.

3. Ensure a cultural fit

When merging or acquiring another company, it is essential to ensure a cultural fit between the two organizations. If the two companies cultures are not compatible, it can lead to problems with communication, morale, and productivity. Additionally, incompatible cultures can result in a high turnover rate, further hindering the new company's growth.

Ensuring a cultural fit between the newly combined company can help make the transition smoother and reduce the likelihood of problems arising. Implementing employee management techniques can also help with this transition. For example, consider having the upper management of both companies come into the office for a learning day to cover the type of management techniques and working environment acceptable in the new culture. 

A compatible culture can help improve communication and morale, positively impacting the new company's growth and overall operating performance.

4. Have a go-to-market plan ready from the outset

A go-to-market strategy must identify the specific market segments of the two companies and how they will both be targeted once the merger happens. For example, are the two markets in direct contrast with each other? Do they share social channels, or are there any causes for online conflict between the two channels? 

A go-to-market strategy should cover how the business will implement its new approach for the market segments, products or services, social channels, and sales. Strategizing sales and channel execution from the outset can also help mitigate previously discussed risks- such as loss in brand recognition and market confusion.

5. Set revenue targets and track progress of organic growth

What are the new revenue goals post-acquisition for a business that has merged or acquired another company? How will the business stay accountable to these revenue objectives? Setting detailed KPI sales and metrics is one way of doing this. 

Successful merging and acquisition growth requires setting revenue targets for the newly combined business. Without these targets, measuring the deal's success and determining whether or not it is providing the desired results can be challenging.

There are a few different ways to approach setting revenue targets. The first option is to set targets based on the combined revenue of the two businesses. This option offers a simple way to set targets to maximize profits, but it does not consider any potential growth due to the deal.

The second option is to set targets based on the market share of the new business. This process accounts for potential growth but accurately estimating the new business's market share can be more challenging. Finally, the third option is to set targets based on the growth rate of the new business. Again, this takes into account both potential growth and the current size of the new company.

The most important thing is choosing a method that makes sense for the business and can be realistically achieved. Once the targets are set, it's vital to track progress and ensure that the company is on track to reach its goals and annual growth rate. Proper planning and setting revenue targets are essential to ensure the business merger is successful. 

6. Determine the business's combined product and service portfolio 

Once the M&A deal has taken place, how will the two companies combine their products and services? Do they each offer different variants of the same product or service? How can the two be bundled into a new type of product or service? Finding the answers to these questions can help your business strategy plan to combine two entities' offerings and make appropriate product alignment decisions. 

The first step is identifying and assessing all companies' products and services. This can be a time-consuming process, but it is essential to understand the business's current state. Once all products and services have been identified, the next step is to group them into similar categories.

There are a few different ways to approach this:

  • Products and services can be combined if they serve the same purpose. For example, if Company A and Company B offer a type of software that performs the same function, the two products can be bundled into a new product.
  • Products and services can be combined if they complement each other. For example, if Company A offers a type of software used for managing inventory, and Company B offers software used for tracking customer data. The two products can be bundled together to create a new product that combines both functionalities. With an increase in sales price, revenue generation could improve while also offering a new type of product that can penetrate the market.
  • Products and services can be combined if they are from the same category. For example, if both companies offer software, they could be marketed as a suite of software products.

The key is to find a way to bundle the products and services together in a way that makes sense for the business. This can be done by looking at what each company does well and finding ways to combine those strengths. It's also important to consider the target market for each product and service and ensure that the new product or service is appealing to new and existing customers.

Mergers and acquisitions can be a great way to grow a business, but it's important to remember that the deal's success depends on how well the products and services are rationalized. By strategically assessing and grouping all products and services, businesses can ensure that they create a new product or service that will be successful in the market.

7. Create a customer service model that integrates both operations

Creating a customer service model that integrates both operations is essential when a business goes through a merger or acquisition. This will help customers get the best possible service and feel informed and supported during the post-deal transition.

When the acquisition deal is closed, the newly joined businesses must ask how they will maintain their service level and retain customers. What changes need to be made to the customer service model to support this new growth and expansion? Is it common ground to take both companies' customer service models and join them harmoniously? 

Since retaining customers and enticing new markets is necessary post-merger deal, how will the newly joined and acquired businesses continue to do this with their unique operations? If the two companies have widely different customer service and sales approaches, then common ground must be reached in a new business growth strategy. 

Consider scalability, market outreach capabilities, current customer service training levels of employees, and other internal processes and intellectual property that could affect this service. Consistent customer care will reassure existing customers that the products and services are still those they trust and can continue to buy and use reliably. Once the customer service model has been created, it's crucial to ensure that it is appropriately implemented and that the employees are trained to use it.

8. Place the customer experience at the forefront of operations

Customer experience is often put on the back burner after an M&A deal because there are so many other things to focus on. However, remember that the customer experience should always be a priority, as a company's customer base keeps them in business and allows for growth. If the overall experience becomes negative for customers, the merged businesses may lose out on customer retention and loyalty. 

Here are a few ways to keep the customer experience a priority:

  • Maintain communication with the customer. They should always know what is going on and how it will affect them.
  • Keep the same level of service. Don't let the quality drop just because there are more customers.
  • Train employees on the new procedures, including the newly implemented customer service model. They should be able to answer any questions the customer may have.
  • Simplify the process. Don't make it more difficult for the customer to do business with you.

The customer experience is essential to business growth after a merger or acquisition. By assessing the customer experience lifecycle and finding ways to improve the cycle, the business will have an easier time with customer retention. In addition, setting revenue targets and tracking progress is essential to ensuring the deal is successful. 

Finally, creating a customer service model that integrates both operations will help ensure that customers get the best possible service. By taking these steps, businesses can ensure that they are placing the customer experience at the forefront and set themselves up for success.

Overall, merging and acquisition growth can be tricky to ensure once a business acquisition occurs. These newly formed companies must be proactive in their measures to implement comprehensive strategies from the outset of the deal. Once complete, conjoined businesses will need a new process for tracking their M&A finance, including expenses and revenue. 

Consolidate your finances in one place with software like QuickBooks Online Advanced to help you manage your books during a critical merger. Start a free trial and join millions of business owners who have successfully implemented this software in their operations today. 

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