What factors should I consider when thinking about merging with another business?
I was approached by another early stage craft business about combining our businesses. It would be great to work with someone else, but I am not sure how to value my business and how to structure such an arrangement. I'd appreciate hearing from others who have been in this situation or who have any experience with such mergers.
The first thing I would consider is the personality of the potential business partner. I'm assuming from your question that you are a sole proprietor who has been approached by another sole proprietor. Make no mistake, you are contemplating entering into a relationship that is as serious as marriage, and often times it is easier to get out of a marriage than a business relationship.
Examine closely both of your strengths and weaknesses. The most successful partnerships are the ones that are complimentary. One of the most common mistakes is to say "We are exactly alike so this out to be a perfect fit." For example, if both of you love creating product but loathe bookwork then you are going to have problems.
I suggest you crate a list of the areas of your business (Production, Marketing, Finances, Sales, Legal, HR, etc.) and rank them based on what you really love. Compare your lists with each other. The more similar they are the less a merger will bring any competitive advantage. But if your lists are complimentary then this could be a match made in heaven.
I am not a lawyer or a financial planner, but I've been through 5 mergers in my career. These were in much larger technology companies, but the process is similar:
1) You need to make sure you can work well with this other person or group of people. No matter how great their product or business is and how well yours fits with theirs, if you don't gel well, you're going to end up regretting the decision in the long run.
2) 50/50 situations don't work well. I'd see about engaging an independent 3rd party to engage should there be some sort of disagreement as someone who can arbitrate.
3) In order to value both companies, you're probably going to need to look at 3-5 years worth of historical financials to determine the intrinsic value of each business as well as the realistic growth potential over the next 5-10 years as well as the added value each business brings to each other over that time span in order to come up with a reasonable valuation.
Jen, in reading the many responses to your question, I especially took note of those by Kyle Restoule and Andrew Marks. This is because they touch on the behavioural side of the merger and I do a lot of behavioural consulting for large and small firms. While they rightly focus on the personalities/likes/dislikes of the two merging owners, I would expand that focus to the organizational cultures. For example, regardless of how compatible the CEOs of Apple and IBM might be, the loose fit "creative" culture of Apple would never tolerate the "black suit" stiff control of an IBM...The question then become not how do we merge, but how do we integrate to create a best of both.
As someone who has gone through this three times and been badly burned every time ...be Very sure this is something you want to do. There is a fine line between combining businesses and hostile take-overs!
The top non-negotiable criteria for now are - do they match our values and what type of culture do they have? And you need to be real specific about both. Do you have your own values and culture documented? Is everyone in your business living those guiding principles? Does the other company have them documented and living them? Are they all about the money? Or is leaving a legacy more important?
If you want to work with someone else, look into turning your business into an employee-owned one, also known as a worker cooperative. Just as much work as a merger, but maybe with a better outcome if you have the right staff already.
It could go either way: Either two in a area could join to combine for the economy of size, or the two could be complimentary; one covering the deficiencies of the other. Depends of existing weaknesses. If no deficiency or weakness, then no need to combine. I decided to stay solo. But then I was not interested in growing huge. Often, it's good enough to "team" from time to time to cover a big job. Been in the consulting business since 1972. Remember there can only be one "boss". If anything, I depend on technology, other consultants, temps and teaming to cover any large volumes.
Mergers hardly ever work as envisioned. Especially, those of entrepreneurs with other entrepreneurs. Typically, what appears to be great synergy on the surface eventually gets lost in the shared management conflicts of the partners. If you ever do it you better have a tightly negotiated merger agreement about who does what, how profits are shared, and who manages who. These kinds of contracts should be negotiated for the end of the relationship, not the beginning like in a marriage.
First of all there is no such thing as a merger. There is only a take-over. One party to a transaction will always emerge as the "boss", however the language is dressed up. If you are confident that is you and everything else lines up then go ahead, but if you have doubts don't think about it any further.
Ask yourself these questions:
1. What is in this for me? Can the proposer bring something to your business that you don't already have or which you could not get by simply working with that person on joint projects? An example might be offices or a workshop. You could simply share and pay rent, no need to merge.
2. Do you like this person, and how well do you know them? You need to be able to get along, have common values etc to be successful in business. It is not dissimilar to marriage so all the same rules apply. Be sure you really know the person before you commit.
3. Can we collaborate to mutual advantage without merging? If the answer is yes, then this is a wise way to go. It allows you to work together with much less risk and potentially ALL of the benefits.
Hope this is helpful.
Several issues immediately come to mind to be considered. One, who will have the controlling interest?Someone has to have the ultimate authority just threw past experience and listening to others that have entered into such relationships 50/50 propositions seldom if ever 21 work out. When merging with another company or start up who has the most assets, volume and net worth? That question will usually answer question number 1. Third, what does the merger bring in way of combined resources? Is the merger with another company a smaller or larger or same size company and does the other side offer the same or different types of products? Start-up valuation is a bit tricky. To determine the most accurate value of a business, consider all the assets, liabilities, recent earnings, future earnings and the skills and abilities needed. If both sides can fit into that framework, there may be a fit. Of utmost importance is to make sure of personality marches.
Build a relationship based upon Trust...Understand your strengths and weaknesses, and then his/hers work together on a specific project or account as a prototype of working together, then trust what your gut says to you...
There are multiple criteria to consider. Firstly, do you want to continue working in the "merged" business? Is the bidder trying to buy you? Typically there are three scenarios -
1) offer fair market value (FMV) - entrepreneurial mode
In this mode, it takes about 6-18 months to close and the owner (seller) is usually out of the decision making role
2) below fair market value - i like to call them vulture capitalist
Take a bouts 0-6 months to close and the seller is relegated to a role of servitude
3) Above FMV - would be a strategic buyer
Takes about 18-36 months and the seller is usually in golden handcuffs
For a business partner you would need to consider the personality and of course be able to trust this person. A business coach might be able to help with the merger, at the same time be the trusted advisor you need till you are able to establish a trusting relationship with your partner. As far as appraisals are considered, you can always reach out to industry experts on valuing your firm. Please note, i am not trying to sell my services here.
Hi Jen, There is a lot more to evaluating a business proposition than merely considering the initial 'proposal." As a Business Broker I am involved in mergers, strategy and appraisals on a daily basis. More than happy to talk to you about it and provide some pointers through the maze.
Start with a joint venture, wait 6 months, and start negotiating a merger within an additional 6 months if it's still all fun after the first 6 months.
Hi Jen, it depends on the industry. There are various formulae for valuating a business. Apart from the valuation, more important is the fact that you should be checking out the business that want to merge with you. Partnership is beyond marriage. It is so so easy to make the wrong decision when you decide to partner with someone else. Soft unspoken issues arise like, value systems, which partners are they with, and the list goes on...Usually accountants will be able to give you a view on the formula to be used for valuating your business...Be super careful though.
Having been done a number of M&A gigs, I can assure you that you have already received a great deal of good advice on a number of areas that are in consideration. Perhaps reducing it to:
WOULD YOU MARRY SOMEONE THIS SOON, BECAUSE THERE IS A PROPOSAL?
this is an equally consuming relationship.
What is the added-value? Can you trust your new partner(s)?
I'd find out who would actually be in charge of the business and what your role if any would be, as well as if you'd need to sign a do not compete agreement.
Work on 1 pilot project as a trial before a more permanent commitment is considered. To be in an exposition or fair together could be the perfect venue. Never refer as your colleague as your partner. In some States this is considered a binding contract. Each of you should have an independent evaluation of your business from an impartial CPA. Think about the pros and cons very carefully before making a decision.. Beverly Kennedy, WBZT,COM or IHEART RADIO, Mon & Sat. 6-8 pm., editor in chief and host of LIFESTYLES MAGAZINE RADIO