The best time to start thinking about a business’ future is years ahead of time. Transitions can take months, even years to complete, so it is even smart to have an idea about your exit goals from the very beginning. Knowing whether you want to sell to employees, venture capitalists, or merge with or sell to another company can help you strategically market your core competencies in a way that makes it appealing to potential buyers or partners.
An overlooked aspect of exit planning is that typically about 80 percent of an owner’s wealth is tied up in their business. Having a vision and positioning your company well will increase your chances for a transaction that maximizes the value of your company and sets you up for a comfortable financial future.
Mergers and acquisitions are two transition options that allow a company to grow its value, eliminate competition, increase market share, create supply chain advantages, and capitalize on economies of scale. Though the terms are often used interchangeably, they are two distinct types of transactions, each with advantages to consider.
A merger brings two companies together, and one company ceases to exist after the completion of the transaction.
Merging two entities can create opportunities for synergies in revenue by growing the new company’s product or service sales potential. A vertical merger, which merges a company and either a supplier or distributor, integrates the value chain. This type of merger can increase revenues and mitigate risk in the supply chain. Alternately, when two competing companies combine in a horizontal merger, the companies reduce competition and can capitalize on synergies by joining infrastructure, leveraging equipment and locations and employees, and capitalizing on core competency strengths.
For an owner that looks to continue their involvement and has a plan for a more gradual exit, the merger may be a nice transition opportunity. The owner would remain involved as part of the new company, typically keeping their income and benefits, ideally with a more profitable company after the merger.
The continued involvement of both owners is also a possible advantage for company culture and morale, as the employees maintain a relationship with their previous leadership through the transition and into the combined company’s next phase.
In an acquisition, one company purchases a majority or complete stake in another company. The result is one company, and the buyer decides whether the purchased company maintains its name and structure.
Like a merger, the acquiring company purchases the acquired company for the opportunity to realize synergies by increasing sales, creating operational efficiencies, reducing competition or risk, or entering a new or niche market without investing in research and development.
An acquisition may be particularly appealing for an owner who is looking to retire or move on separately from their company because it is a turnkey transaction. After the completion, their involvement, and their liability with the company, ceases altogether.
First Steps to A Successful Transaction
Though many companies enter the expensive and time-consuming merging or acquisition process, not all deals are completed. It’s important to have a solid team in place to mitigate risks and ensure a seamless closing and transition. From the very beginning, make sure to leverage the strengths of your own leadership team and consult with the right professionals, including lawyers, accountants, and investment bankers. For further details, read our blog entry on assembling a successful team.
Another crucial aspect of a successful transaction is creating a trusting, transparent relationship with the other company from the beginning. It is important to meet with both teams early and have frank, collaborative conversations to determine if the deal is mutually beneficial. If both sides are upfront and honest from the onset about their big-picture goals, material terms, priorities and provisions, the deal is much more likely to be completed without major issues.
Jacko Law Group, PC and its attorneys can help
The team Jacko Law Group, PC (“JLG”) features talent who are well-versed at any phase of an M&A transaction, including certified exit planners, and have extensive experience on both the buying and selling side of merger and acquisition transactions. We can serve as the point of contact to quarterback the entire process or assist with specific aspects of your deal.
Our attorneys are skilled at structuring and reviewing transactions, drafting or reviewing agreements and nondisclosure agreements. The attorneys can also advise on how to complete your transaction in the most tax-efficient manner, perform due diligence thoroughly, and ensure that your transaction follows regulatory compliance and goes smoothly. Contact us at 619.298.2880 to schedule a consultation.