MightyRecruiterMergers occur quite frequently in the United States. Not only can mergers increase the strength of companies, but in some cases they can keep companies from going out of business. While there are many potential benefits of engaging in a merger, there are also some issues companies should be aware of before negotiating and signing a merger contract.
What Are Mergers?
A merger occurs when two or more businesses combine to form one new business. Companies may join forces in an attempt to gain a greater share of the market or as a way to increase efficiency. A merger where the combining companies are approximately the same size is known as a merger of equals. However, there are also situations where one company may be larger than another. Mergers may be friendly business transactions and can involve companies that are in agreement on the combination.
Types of Mergers
There are several types of mergers, such as vertical, horizontal, market-extension or product-extension mergers. Conglomerations describe mergers that take place between businesses involved in unrelated industries. Vertical mergers occur between businesses that each produce a part of a final product. For example, a company that sells pizza may merge with a business that distributes different types of cheese or pizza dough. A horizontal merger, on the other hand, occurs when two businesses that compete in the same industry or complementary industries and solicit to the same market share combine. Market-extension mergers are the joining of two companies that sell the same service or product, but to different markets. Product-extension mergers, on the other hand, involve businesses that sell different products within the same market. By joining the two businesses together, the resulting companys market and/or product line will likely increase. The route by which a merger is financed can also be used to classify the transaction. For instance, a consolidation merger occurs when two or more businesses join together to form a brand new entity. Purchase mergers are different in that they involve one business buying another. This sale is taxable, which offers a tax benefit to the purchasing company.
Merger Checklist
There are certain things a company should do in order to prepare for a merger. Before starting the process, company owners should have a full understanding of what the merger procedure entails. The company should fully comprehend the consequences of the merger and what it has to gain by engaging in the business transaction. It can be extremely advantageous to streamline the business before merging it with another company. In addition to cleaning up any incomplete financial statements, company officials should ensure the business is current on all of its bills and taxes. It is critical to keep all of the companys documents, such as licenses, permits, employee contracts and registrations, organized so that they arent misplaced in the common chaos of a business merger. As a way to strengthen the foundation of the newly formed company and to minimize the risk of future downfall, the owners may want to evaluate company cultures. They may want to put together a plan to transition these cultures into a new, improved and updated version of the company. Prior to negotiating the terms of the merger and signing a legal contract, it is crucial that both parties thoroughly read and understand everything included in the official merger document, including confidentiality arrangements. These clauses prohibit the company from disclosing to others certain information regarding the merger.
Benefits of a Merger
Businesses that merge may have several advantages. In some cases, mergers may enable two struggling companies to survive in a competitive market. Companies may have greater purchasing power once they are combined, meaning they are better able to negotiate the terms and prices of their purchases. When companies combine, they may have access to new technology that could potentially increase the performance of the business and give it an edge when competing in the market. Furthermore, businesses that have loyal followings can capture different areas of the market once they combine to form one solid company.