Choosing to buy or sell a business comes with many complex decisions that must be weighed and considered. Critical to making these choices is developing a deep understanding of the options available when finalizing a sale.
Two of the most common methods of buying or selling a company are mergers and acquisitions. Both of these strategies are methods by which to combine two companies into one with the goal of increasing the capabilities of both moving forward. It is no wonder that they are often confused and lumped together as being the same, but in reality, there are several important distinctions between them. If you are assessing a merger or acquisition as part of your sale, it is crucial that you know about these differences.
What is a Merger?
A merger is when two companies join together to form a new entity. This process is typically part of a broader strategy between the two organizations to consolidate resources and produce a new management structure that will help both grow together. Usually, a new name will be given to the merged company, whether a hybrid of the two former names or an entirely new one is the choice of those involved.
In an ideal situation, both companies would consider each other to be equal and the power difference between them is inconsequential, which is why a merger is generally understood to be a friendly and planned process. However, that is rarely the case as many leaders find it challenging to agree on all strategic items about how the unified organization should move forward. Such disagreements can lead to a lot of tense conversations throughout the integration process.
What Is An Acquisition?
In contrast, when an acquisition takes place, a new company does not emerge. Instead, the smaller of the two companies is absorbed into the more substantial one and ceases to exist moving forward. This strategy requires the acquired company to take on the name of their buyer and give up all decision-making power unless other terms are stipulated in the acquisition agreement. In some cases, a larger company may acquire a piece or division of the smaller organization.
As a result, an acquisition is often viewed negatively as the buyer will take over all operational management decisions and have absolute power of the acquired organization after the deal is finalized. Due to these negative connotations, many companies will refer to an acquisition as a merger even when it is definitely not. This misrepresentation has resulted in the two terms becoming increasingly convoluted and misused as synonyms. In truth, acquisitions are far more common than mergers.
What to Expect During a Merger or Acquisition
Regardless of the scenario you pursue, merger or acquisition, the leadership of both organizations involved in the process should expect to undergo a significant level of scrutiny across all areas of the business. To better prepare for this and speed up the due diligence process, it is best to organize all your documentation ahead of time.
For more specifics, check out The #1 Checklist to Selling a Business. This guide will walk you through all of the various items you will need to consider as part of the selling or purchasing process including corporate structure, tax documentation, intellectual property, material assets, and customer contracts.
Additionally, it is best to determine the value of your company before entering into a sale. Though there are a number of methods at your disposal that will vary in accuracy, this exercise will help you evaluate whether a particular proposal would constitute a merger or an acquisition. Knowing the estimated valuation of your business will also protect you from being taken advantage of during the process of a sale or purchase.
Get Help From The Hatteras Group
The Hatteras Group is a collaborative team of professional intermediaries and advisors that guides business owners and entrepreneurs as they navigate the complex process of mergers or acquisitions in a variety of industries. Generally, we work with those companies whose annual revenues are $5MM to $100MM.
If you are trying to value your business in an effort to sell it, we can help you audit the health of your company with an advanced 10-point evaluation checklist to determine if there are any issues that could potentially derail a sale in the future. Contact us today for more information!