By Shane Connors. 9th August 2013
The last five years have placed incredible pressure on SME owners. Those who have survived have done so by cutting costs, downsizing and becoming more efficient. In most cases, this was done with the backdrop of reduced funds being available. The challenge now is to ride out the remainder of the storm and position your business for the upturn. In most cases, this requires capital.
The traditional sources of funding are, for most businesses, exhausted at this stage. The banks will only lend to certain businesses, and personal and family savings have dwindled. Other funding sources such as Angel Investors and Crowd Funding are available, but perhaps to a limited number and at a premium.
Another way of funding future growth is by way of merger of a similar or complementary business. By combining two businesses, it can lead to economies of scale and cost reductions, and these savings can then be used to grow the business. While this option is often overlooked by business owners, it offers a number of advantages if managed correctly :
- It can be done on a very limited budget.
- It can be done quickly if structured correctly.
- It may allow for further on-going cost savings, by implementing the best systems and processes of both businesses.
- By having greater scale, it may allow you to enhance your business profile and offering to attract new customers (e.g. selling complimentary products to existing customers).
However, for a merger to be successful, there are a number of important issues which need to be considered. The following is an outline of some of the main issues:
- Who will be in charge after the merger? Generally, there is seen to be a winner and a loser, even if only externally. While this is not always the case, if you are the smaller party, then you need to be prepared to relinquish some control.
- Will you retain all of your existing customers, after the merger? For example, if you are merging with a direct competitor, how will your customers react? Are there any historical issues with them to consider?
- What brand or business name do you use? Is one preferred over the other, are the old ones amalgamated, or is there a new name for the new entity?
- What is the best legal structure to use? Generally, both of the old structures will be wound down, and a new company/ partnership will be formed, with new (perhaps updated) terms and conditions. For example, I saw one case where an accounting firm were happy to give up the use of their name, in return for a better exit mechanism than was previously in place
- Another key issue to consider is the cultural fit, not just of the directors and management team, but also of the staff themselves. For example, if merging a regionally based Leinster business with a Dublin based business, how will the staff interact? Both teams will be asked to change their working practices to a certain extent. They may also be from city and country backgrounds, with different interests and perhaps different age profiles. Finding the right fit during the prospecting process is therefore important. A site visit is a critical part of the process, and can be done in a confidential manner.
- There are a number of Employment law issues to consider, such as TUPE and continuity of service, and if redundancies or role changes are required, how these might be managed. Generally, all staff will need to put on the same terms and conditions, over a short period of time. It is important to take HR and legal advice on this.
- There may be other legal issues to consider, for example, if transferring a lease to a new entity, or seeking to surrender a lease if moving premises. This may particularly be an issue if personal guarantees were put in place, as these may now have to reviewed and modified. Your solicitor or property adviser can assist you with this.
These are just some of the issues to consider, and may differ from case to case. The important thing is to be aware of them, and to get comfort on these as early as possible while prospecting for candidates, or during the negotiation process. This will mean that time is not wasted on unsuitable partners. If these can be overcome, then all parties will benefit and the merger will succeed.
One final thought. Once the deal is announced, there will be a lot of staff, customer and supplier interaction required. It is important to be available to deal with these, and to expect some resistance. The successful mergers are the ones which bring these stakeholders with them from the start, by being frank, open and transparent.
If you would like to discuss merger opportunities, please contact me at the details below.Shane Connors Managing Director www.savvy.ie email: firstname.lastname@example.org phone: 01 960 2260 mobile: 086 3835138