Vertical Mergers are an Effective Strategy for Growing Your Business
Growing your business quickly can be a challenge. However, growing your business through a vertical merger or acquisition can be done with relative speed, and at a relatively low cost. A vertical merger is about merging with a business in your industry: your suppliers or your customers. For example, a car dealership may want to merge with a small independent insurance broker (to improve onsite insurance services) or a bakery that acquires or merges with a coffee shop (to help sell its baked goods).
The difference between mergers and acquisitions is often not well understood. A merger is when two businesses merge operations, usually on a voluntary basis. The goal is to achieve a win-win for both businesses. An acquisition is where one business acquires or buys the other. The goal of the business buying the other business is to win; that doesn't mean the other business has to lose but that is the common outcome. Your business can grow through both merger and acquisition, however it is important that your growth plans accommodate the challenge of managing changes that will result from merging with, or acquiring, another business and still realize your strategic plan.
Your business might face the challenges of not only acquiring and/or merging two businesses but also of merging two cultures into one group; of laying-off staff in overlapping or duplicate roles (who goes, who stays); of looking for, and implementing, synergies to improve operating efficiencies; of reducing expenses and increasing revenues; of communicating changes with customers; of strengthening your brand's reputation; and more. The challenge with a merger or acquisition is that you will need to weigh the pros and cons of decisions quickly, while still keeping a focus on running your business. In deciding whether or not to merge or acquire a company, you will need to assess the costs of managing change and the impacts on your business against the benefits of accelerated growth, reduction of costs and potential for improving market position.
In addition to vertical mergers and acquisitions, you need to understand horizontal mergers. A horizontal merger is where you merge with (or acquire) a competitor. You may want to add their customers to your 'sales book' or to buy their strengths (which might be a weakness for your business). If your strategic plan is to build a diversified business (and there are some significant advantages to diversification), it is much faster to merge or acquire than it is to build it internally. For example, the company you have targeted might have developed a new product development process that results in a very successful new product launch program. Or they may have better geographic locations or branches that will enable you to grow your sales quickly. Perhaps the target company has successfully entered a new market you are interested in; or won a new long-term key account contract. These are all reasons to consider a horizontal merger.
The growth your business achieves through acquisition or merger is inorganic growth; it can be costly. You need to ensure there is enough value in this type of growth; hire a good accountant to help you with the merger or acquisition accounting. Organic growth is slower, is internal to your business, and it occurs through new product development, sales, resources management, and continuous productivity improvements. An acquisition or merger has key factors that provide a good indication for success. Some of these key success indicators are: the merger or acquisition will provide a big improvement in customer service and resulting customer satisfaction; there is significant alignment with your strategic business plan and vision; you will be able to reduce your costs significantly through merger or acquisition synergies and economies of scale; your organization is capable of managing the change that will be necessary to blend two businesses; and an increase in market share can be achieved through the merger or acquisition.
Mergers and acquisitions have been a popular strategy for business growth over the past decade. A vertical merger strategy can be more successful than an acquisition or horizontal merger because it is not as adversarial in nature and therefore is often managed more successfully. Before you make a decision for inorganic growth, develop your merger acquisition checklist to ensure you understand what it takes to make this strategy a success. Make sure you consider the costs along with the benefits if you are considering mergers or acquisitions as your growth strategy.
The difference between mergers and acquisitions is often not well understood. A merger is when two businesses merge operations, usually on a voluntary basis. The goal is to achieve a win-win for both businesses. An acquisition is where one business acquires or buys the other. The goal of the business buying the other business is to win; that doesn't mean the other business has to lose but that is the common outcome. Your business can grow through both merger and acquisition, however it is important that your growth plans accommodate the challenge of managing changes that will result from merging with, or acquiring, another business and still realize your strategic plan.
Your business might face the challenges of not only acquiring and/or merging two businesses but also of merging two cultures into one group; of laying-off staff in overlapping or duplicate roles (who goes, who stays); of looking for, and implementing, synergies to improve operating efficiencies; of reducing expenses and increasing revenues; of communicating changes with customers; of strengthening your brand's reputation; and more. The challenge with a merger or acquisition is that you will need to weigh the pros and cons of decisions quickly, while still keeping a focus on running your business. In deciding whether or not to merge or acquire a company, you will need to assess the costs of managing change and the impacts on your business against the benefits of accelerated growth, reduction of costs and potential for improving market position.
In addition to vertical mergers and acquisitions, you need to understand horizontal mergers. A horizontal merger is where you merge with (or acquire) a competitor. You may want to add their customers to your 'sales book' or to buy their strengths (which might be a weakness for your business). If your strategic plan is to build a diversified business (and there are some significant advantages to diversification), it is much faster to merge or acquire than it is to build it internally. For example, the company you have targeted might have developed a new product development process that results in a very successful new product launch program. Or they may have better geographic locations or branches that will enable you to grow your sales quickly. Perhaps the target company has successfully entered a new market you are interested in; or won a new long-term key account contract. These are all reasons to consider a horizontal merger.
The growth your business achieves through acquisition or merger is inorganic growth; it can be costly. You need to ensure there is enough value in this type of growth; hire a good accountant to help you with the merger or acquisition accounting. Organic growth is slower, is internal to your business, and it occurs through new product development, sales, resources management, and continuous productivity improvements. An acquisition or merger has key factors that provide a good indication for success. Some of these key success indicators are: the merger or acquisition will provide a big improvement in customer service and resulting customer satisfaction; there is significant alignment with your strategic business plan and vision; you will be able to reduce your costs significantly through merger or acquisition synergies and economies of scale; your organization is capable of managing the change that will be necessary to blend two businesses; and an increase in market share can be achieved through the merger or acquisition.
Mergers and acquisitions have been a popular strategy for business growth over the past decade. A vertical merger strategy can be more successful than an acquisition or horizontal merger because it is not as adversarial in nature and therefore is often managed more successfully. Before you make a decision for inorganic growth, develop your merger acquisition checklist to ensure you understand what it takes to make this strategy a success. Make sure you consider the costs along with the benefits if you are considering mergers or acquisitions as your growth strategy.
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To learn more about success factors for a vertical merger; diversification options, and other growth strategies to build and grow your business, visit Kris Bovay's More For Small Business site.
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