Nick Wootton, head of mergers and acquisitions at CJCH Solicitors, offers advice to SMEs looking to take the leap into a merger
After successfully overcoming the hurdles of launching an SME, business owners may finally feel ready to take the next step.
Strengthening their offering and expanding into a new geographical market are just some of the factors that might motivate companies to consider growth.
And when discussions inevitably begin, one of the next steps is to explore a merger.
A merger can be beneficial to a growing SME for a number of reasons, providing them with the space, finances, and flexibility to grow naturally.
But once they’ve chosen the ideal company to merge with, where do they begin? What are the benefits? And what are the potential issue of merging with another team?
SME: When it comes to mergers where would you suggest an SME starts?
I would start by looking very critically internally. Understand what your business is, why it exists and what the purpose of a merger would be.
Once you understand the internal elements, strengths and weaknesses, then look externally into the market to understand what your market is looking for; who out there could provide it; and who would be your biggest competition.
Identifying an appropriate merger or acquisition opportunity is not as simple as identifying a company you like and combining your efforts; it takes extensive due diligence to understand their leadership and equity structures, the risks on both sides of the deal, and the potential strategy you will put in place after the deal is concluded to ensure your new organisation is able to function and generate income as quickly and efficiently as possible.
SME: How can a merger benefit an SME?
In short, the most obvious benefits are cost savings – in terms of overheads and duplication; knowledge sharing – in terms of experience and innovation; and, depending on the type of business, geographic footprint and distribution channel expansion.
A company may wish to expand its footprint, and rather than take on the cost of acquiring new premises in an area they are not familiar with, it often makes more sense to purchase, or merge with, a similar company. This will help them retain market share and resources of the new entity, as well as insight into the consumer base and knowledge transfer.
They may also want to expand in terms of service and offering; this is where a merger takes place to combine two or more complimentary specialities that makes for a more efficient or streamline supply-chain.
A merger can also have financial benefits. Bringing together multiple companies that perform similar tasks can reduce their overheads into a single cost centre, while maintaining the output of multiple companies, thereby improving economies of scale.
SME: What are the biggest potential challenges?
There are various potential challenges to consider when bringing together two businesses.
The time and resources needed to consolidate the merging entities is something which should be explored thoroughly. The consolidation of technology and IT systems is another, along with working structure in each office, and finances which often need to be unbundled and restructured to suit the needs of the new combined entity.
There is also significant time and resources required for training staff in new systems, and, depending on the type of businesses being merged, you may need to run two or more financial and systems procedures for extended periods of time.
You also need to think about relocation of support staff to consider when you may need to, for example, centralise a finance department/team previously in different offices but now all need to be together to function properly in the merged organisation.”
SME: Is merging two teams particularly tricky?
It can be. Established companies, much like communities, have set cultures and behavioural norms. You will often find that teams do things in a similar way, or even do the exact same tasks but just in a different process, and then struggle to find a cohesive way to integrate.
Communication and change management are critical in these instances and need to be managed right from the start. It is often beneficial to map out the procedures of both teams and work through them in a workshop format, so as to allow them to identify the similarities and then mutually agree on an approach to integrate the differences.”
SME: How important is putting in place an effective merger strategy?
Having a clear and well-managed merger strategy is critical. You need to ensure the checks and balances are in place with key deciding factors, roles and responsibilities defined.
Your ability to properly audit all entities being considered and understand how they would integrate is important. You need to understand the human element as well as the technical.
A merger is not simply a mutual rebranding of two or more companies, it is breaking apart of two or more existing organisations in order to put the parts back together in a more cohesive and practical manner.
There are various legal, financial, ethical, technological, practical and structural considerations and decisions to be made before you proceed with merger discussions.
SME: How important is the due diligence process? And what would you advise both businesses consider?
Due diligence is the process of analysing all elements to ensure all legal and fiduciary components of the matter are considered and addressed appropriately.
It is one of the most critical stages of the deal and establishes the foundation upon which the entire transaction is conducted.
Undertaking due diligence enables you to get a fully comprehensive picture of all the financial aspects of a business you are considering merging with, this is your opportunity to ask about assets, staff, contracts, clients, and even debt, so it is crucial to gain a better understanding of the company before you merge.
