Buy-side, Guides, Sell-side

What is M&A? An Introduction for Small Business Owners

August 21, 2023

Mergers and acquisitions (M&A) might sound like complex terms reserved for the boardrooms of large corporations, but they are equally relevant to small business owners. Understanding M&A can open up strategic opportunities for growth, diversification, or even a profitable exit from your business. This post will break down the basics of business acquisitions M&A and explain why it might be something you, as a small business owner, should consider.

It is better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price.

– Warren Buffett

What are Mergers and Acquisitions

  • Mergers: A merger occurs when two companies, typically of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered, and new company stock is issued in their place.

  • Acquisitions: An acquisition, on the other hand, happens when one company takes over another and clearly establishes itself as the new owner. The acquiree company does not change its name or legal structure but is owned by the parent company. In some cases, acquisitions can be friendly (agreed upon by both companies) or hostile (the target company does not want to be purchased).

  • Exits or Divestitures: An exit or divestiture occurs when a business owner decides to sell their entire business or a part of it. This process is often pursued to realize capital, manage personal transitions like retirement, or shift strategic focus. In an exit, the business or part of the business is completely transferred to a new owner, often resulting in a significant financial return to the original owner(s). This can be structured as a sale to another company, a management buyout, or selling to an investor or group of investors. Generally speaking, the term “Mergers and Acquisitions” encompasses exits and divestitures.


Why Consider M&A?

For small businesses, entering into an M&A agreement can be a significant but beneficial strategy. Here’s why:

  1. Growth: Acquiring another company can be a quicker, cheaper, and less risky proposition than expanding through organic growth, especially when the target company has capabilities that complement your own.
  2. Increased Market Share: By buying a competitor, a small business can increase its market share, even in a saturated environment. This often translates to increased bargaining power with suppliers and customers.
  3. Diversification: Mergers and acquisitions allow businesses to diversify their products and services. If your business is too focused on a single customer base or product line, M&A can mitigate this risk by broadening your company’s range.
  4. Exit Strategy: For small business owners looking to retire or change direction, selling their business can be an excellent way to ensure the company’s legacy while also benefiting financially.


What Does the M&A Process Involve?

The process generally involves several steps, from valuation, due diligence, and negotiations to the final integration of the businesses. Here’s a brief overview:

  • Valuation: Assessing the worth of the business to determine a fair price.
  • Due Diligence: Thoroughly investigating the financial, legal, and operational aspects of the target company.
  • Negotiation: Agreeing on a price and the terms of the purchase.
  • Integration: Combining the operations of two companies into one.

Conclusion

M&A can be a gateway to new opportunities for small business owners. Whether you’re looking to grow, diversify, or exit your business, understanding how mergers and acquisitions work can help you make more informed decisions that align with your long-term business goals. Remember, considering M&A as a strategy should involve careful planning and consultation with financial and legal advisors specialized in this field.