Most talk regarding mergers and acquisitions revolves around large entities and millions of pounds. For example, Q1 2023 saw significant foreign acquisitions in the UK, with a £6.9 billion increase from the previous quarter.
Small businesses merge and acquire each other too. These moves allow smaller entities to expand quickly and pool resources to tackle competitive markets. In this guide, we reveal what you need to know about small business mergers.
Is it quicker to merge small businesses?
Smaller businesses can be quicker to merge since deals are often less complex. Furthermore, small businesses often have cleaner finances and have no international business units to bring together.
Due to these entities’ smaller size, it’s rare for antitrust authorities like the UK’s Competition and Markets Authority (CMA) or governments to intervene in a proposed merger.
Even though small businesses can be easier to merge, processes like disclosure and due diligence require the same careful thought as merging with a larger company.
Finally, the friendliness of each business owner can also impact your timeline. For example, if Business A wishes to merge with a brand to eliminate the competition, it may decide to perform a hostile takeover of Business B.
This process could take years, especially if there is considerable resistance from all of Business B’s stakeholders.
Merger vs. Acquisition: What’s the difference?
Mergers and acquisitions are often viewed as interchangeable, but this isn’t necessarily true.
A merger combines two firms to form a new entity under a single corporate banner. Both names may be combined to form a new business, or both parties may create a new brand.
On the other hand, an acquisition is where one company purchases another outright and absorbs it. Acquisitions usually lead to one brand remaining the same and the other disappearing entirely.
What to consider before merging small businesses
In the UK, small and medium-sized enterprises account for 99.9% of the business community, so an attempted merger isn’t unusual. It’s just that these mergers rarely make the headlines.
So, what should you consider before opting for a merger between small businesses?
Why do you want to carry out a merger?
Mergers must have a goal in mind, or it’s a lot of work for potentially little gain. All entrepreneurs must carry out in-depth discussions with all stakeholders to ensure everyone is on the same page.
Outline your goals and what constitutes success to determine whether a merger is really the right move. Likewise, this vision should coincide with that of the other company’s owners; unless opting for a hostile takeover.
Some of the reasons why you may want to commit to a small business merger include:
- Grow your market share.
- Remove a competitor from the board.
- Take advantage of specific systems or distribution channels.
- Acquire talented employees.
- Take control of a piece of intellectual property.
Regardless of your reasons, they must be backed up by hard numbers. Your objectives will rest at the heart of any merger and subsequent integration strategy. By clarifying your vision and defending it, you can make the path to integration smoother.
What type of merger is right for me?
Mergers come in many different forms. Each type of merger may be executed for entirely different reasons. If you’re floating the idea of a merger, analyse the various options and determine which best aligns with your needs.
The most common merger categories include:
Horizontal – Two companies with similar businesses merge to increase their product/service catalogue. This is an extremely common option for small businesses looking to grow quickly.
Vertical – Vertical mergers involve two companies at different points in the supply chain. For example, a retailer may acquire the manufacturer of its products.
Conglomerate – Two different yet complementary businesses join up to expand their catalogues.
Concentric – In this scenario, a concentric merger is where two businesses with similar products/services and customers come together to scale and expand their offerings.
Every type of merger has its pros and cons. It’s vital to consider them when determining the best setup for your upcoming merger.
Are you ready?
It sounds like a redundant question, but a surprising number of companies believe they’re ready but aren’t; but what constitutes being ready?
Appoint a team of accountants to thoroughly audit your finances before doing anything. They can give you a straight answer regarding whether your business has the liquidity and robustness to complete a merger and make the most of it.
Potential issues of merging small businesses
Mergers always come with their complications. Although some obstacles can crop up from nowhere, most problems can be anticipated and planned for before a potential merger or during due diligence.
Some of the most common problems include the following:
- Cultural differences
- Integration complexity
- Employee morale/retention
- Customer retention
- Financial strain
- Regulatory compliance
- Communication
- Loss of brand identity
- Overlapping roles
- Transition management
Most problems can be worked through without risking the deal falling through. However, mergers fail constantly, even when they involve small businesses.
For example, retailer Bonmarche was set to be acquired by British billionaire Philip Day. However, due to concerns about the offer and the long-term viability of the business within the challenging retail environment, the merger failed, leading to Bonmarche calling in administrators before eventually folding.
The merger process for small businesses
Managing a merger for the first time can be overwhelming. Splitting the process and setting up a dedicated team to handle each part of your merger checklist is the best way to simplify a complex process.
Here’s each step in the process, followed by everything you need to do to leave no stone unturned.
Pre-merger
Research – The first step is identifying targets and assessing each option’s pros and cons. Any target on your shortlist should firmly align with your established merger goals.
Define – With a crystal-clear goal in mind, prepare a presentation to communicate this goal to your stakeholders and explain why a target business can help you take one step closer to your primary objective.
Build – You’ll require the support of a team of professionals to manage each step of the merger process. This may involve bringing outsiders, including an experienced law firm, corporate accountants and professional advisors to support communication between parties.
Assessment – Consider the impact of your proposed merger. For example, will your shareholders’ voting rights be diluted? What will you give in exchange for keeping them happy? How will it impact existing employees, and how will you reassure them?
Cost – Mergers always come with costs, including direct overheads from your lawyers, staff turnover, and productivity drops. Factor in these costs and put a pound figure on the merger.
During the merger
Once both parties agree to enter a formal process, each merger will follow a set of defined steps. This represents the bulk of the merger process and can take anywhere from six to twelve months on average.
1. Complete initial research and planning, including pre-contract discussions and signing a Letter of Intent (LOI).
2. Sign an in-principle agreement to cover the financial side of the merger.
3. Appoint your team formally to manage the process and connect them with their counterparts.
4. Communicate to stakeholders about the planned merger.
5. Carry out the due diligence process. This will involve confirming the accuracy and completeness of the information provided to you by the other side. Expect this to be the longest part of the process.
6. Develop an integration plan for bringing both operations together.
7. Negotiate and finalise the terms and conditions of the merger. Your legal team will draft a contract that satisfies both sides and achieves legal compliance.
8. Launch your merger and communicate it with the public and relevant stakeholders.
Whilst the above sounds simple enough, far more goes into navigating each step in the process. Moreover, listing every hurdle a small business may encounter as they pursue a merger is impossible.
Post-merger integration
Post-merger is where you will begin putting your integration plans into action. Depending on the size and complexity of your new, combined operation, this could be an effect that lasts for months or years.
So, what goes into making your merger successful?
- Maintain communication with all stakeholders, including employees who may be concerned about their jobs.
- Plan to optimise the natural advantages of the two companies that have come together. In particular, you should focus on how to merge two distinct company cultures.
- Prioritise urgent sticking points and make problem-solving a company-wide endeavour. Don’t be afraid to make changes if unexpected problems arise or a solution fails to have the desired effect.
Above all, maintain contact with your financial and legal professionals. Companies that continue to listen to their advisors during the integration phase are likelier to succeed than those that discard them after completing their respective mergers.
Merger strategy for a small business
All small businesses require a defined strategy for carrying out a merger. By anticipating potential problems, you can avoid snags from derailing your plans at critical junctures.
As a small business owner however, you may not have the experience to manage a merger.
This is where hiring experienced professionals who know the ins and outs of UK small business mergers provides value. At Hilton Smythe, we have a team of experienced operators who can help you manage your merger from start to finish.
To learn more about UK small business mergers, speak to the team today.
