Can I Merge Two Companies That I Own? | Hilton Smythe

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Can I Merge Two Companies That I Own?

No specific legislation prevents you from merging two businesses that you own. With most M&A advice centering on due diligence, here’s some advice on the topic of merging your own businesses.

Discussions regarding the UK’s merger and takeover oversight processes have raged all year. It has made many managing directors wonder where they stand regarding their next moves.

However, the announcement that the UK’s investment screening power is being pared back has brought some clarity to the situation. Although mergers and acquisitions (M&A) can be confusing, one question that often arises is, “Can I merge two companies that I own?”

With most M&A advice centering on due diligence and negotiating with another party, the answer to this question may not be immediately apparent. Let’s discuss this issue.

No specific legislation prevents you from merging two businesses that you own. Under the Companies Act 2006, a limited company is a separate legal personality. In other words, it acts alone, meaning nothing is stopping two limited companies from merging.

This would be different from a business person classified as a sole trader. In the case of a sole trader, no second legal entity is established, and all income is taxed via your personal UK tax return.

For two limited companies you own, each would file a separate tax return and pay corporation tax. The managing director would also file a personal income tax form and pay the appropriate tax.

So, you’re free to merge.

Why would you want to merge your own businesses in the first place?

It’s a valid question because, in most cases, there is a reason why the owner has chosen to create separate businesses and deal with the added workload of managing both separately.

For example, Richard Branson owns more than 60 different companies via the Virgin Group. Reasons for this include making them easier to manage, too much diversity to bring them together, operating in different geographical markets, or simply tax efficiency.

Some of the reasons why you may want to move in the opposite direction include:

Streamline Operations – Two similar companies operating in the same or complementary industries can often benefit from merging by eliminating redundancies and streamlining their processes to reduce overall costs.

Boost Your Market Positioning – Owning multiple companies with their own standing can spread your overall market position. However, merging your own businesses can combine their strengths, leading to a more substantial footprint and making it easier to access new markets and attract investment.

Make Management Simple – Consider the administrative workload of running a company. Double that workload if you have two businesses, triple it if you have three, and so on. Merging your businesses can compress management headaches and simplify your life.

Of course, it’s not as simple as that. Even if you own both businesses, it doesn’t make them compatible.

For example, if you own a restaurant chain and a travel agency, there’s no relation, so bringing them together would only muddy the waters whilst delivering no benefits.

The same principle applies to placing your companies under a single conglomerate as it does to merging two of your companies.

Nothing prevents you from creating a conglomerate. For example, American billionaire Warren Buffet uses Berkshire Hathaway as an umbrella company containing 55 companies he owns or part-owns.

Conglomerates make diversifying easier, making business empires far more resilient to downturns in specific economic sectors. Moreover, they can offer complementary services and combine their strengths to dominate markets.

If this is the way forward, it’s perfectly legal.

The merger process for two companies you own is the same as merging any other pair of companies. The difference is you don’t need to worry too much about due diligence because you already have the information to hand as the owner of both parties.

However, you must remember that the two companies are separate legal entities. It means they have their own finances, and any transaction involving a single owner will have significant tax implications.

Moreover, there are some legal aspects to think about that have been put in place to prevent market abuses. For example, larger UK mergers must consider the Fair Offer principle, detailed in the Companies Act 2006.

Under this principle, a fair share offer must be made in the case of a takeover. This prevents a takeover from passing with some token amount like £1. Naturally, these rules generally only apply to more prominent mergers that would impact the broader market.

Most owners that merge their own businesses instead focus on the following questions:

  • Which compliance issues do I need to consider before launching the merger?
  • How will this merger impact how I manage and control my companies?
  • What are the tax implications of merging my companies?
  • Are there any implications within geographic markets away from the UK that I must consider?
  • Will there likely be pushback from either company’s employees, customers, or other stakeholders?
  • What do I hope to achieve by turning two companies into one?
  • Is this the best way to achieve my goals? For example, would a conglomerate make more sense than a straight merger?

Although you may own both companies, you should still take legal and business advice before launching your merger. Making the wrong move can still cost you significant time, effort and money.

Mergers can fall through for several reasons. In fact, 50-90% of M&A deals fail to achieve their goals for one reason or another.

You may be asking how a merger between two companies owned by the same person can fail.

Occasionally, these mergers do fail. For example, the owner discovers no financial benefits to merging, they experience a minority shareholder revolt, their customers express their displeasure, or regulators put a stop to the deal.

Any of these reasons could result in your self-merger falling through, and the effects can be catastrophic, with effects including:

·  Future employee layoffs.

·  Adverse effects on your brand’s reputation.

·  Loss of brand loyalty.

·  Reduced revenue.

·  Increased operational costs.

·  Elevated tax losses.

Sometimes, failed mergers can compromise a business and contribute to its permanent closure.

Although there’s no need to worry about tough negotiations with another managing director, your merger still has the potential to fail. It underlines the importance of consulting a UK business merger expert who can advise you on the pros, cons and processes involved in making a merger happen.At Hilton Smythe, our team has extensive experience in the M&A sector, supporting and advising businesses as they embark upon mergers and acquisitions across the macroeconomic landscape. If you need help with an upcoming business merger, speak to the team today.

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