Mergers and acquisitions (M&A) activity has been on the rise in recent years, with more and more small businesses pursuing deals. As the economy rebounds from the pandemic, this trend is expected to continue as business owners look for opportunities to grow and combine forces.
For small businesses, participating in an M&A deal can provide a fast track to growth, access new markets and capabilities, or add synergies to create a stronger combined company.
However, successfully navigating the M&A process also comes with many potential pitfalls and challenges that small business owners must be prepared for.
This guide will walk through the key steps in the M&A process and highlight the most common issues and obstacles from the small business perspective. With the right information and advice, small business owners can pursue M&A as a potential growth strategy while avoiding missteps along the way.
Overview of M&A
Mergers and acquisitions (M&A) refers to the consolidation of companies or assets through financial transactions. With an M&A, two companies combine to form a new entity, or one company absorbs the other to expand. M&A deals often make strategic sense for companies looking to grow quickly, enter new markets, or gain technology and expertise. However, they are complex and require thorough planning to integrate distinct corporate cultures and operations.
Why Do Small Businesses Pursue M&A?
There are several key reasons why a small business may consider pursuing an M&A deal:
Access New Markets
An acquisition can instantly reach new geographies, product lines, or distribution channels. This can fuel growth and provide new revenue opportunities that would take years to build organically.
Economies of Scale
Combining forces with another company can also produce cost savings through economies of scale. The combined entity can reduce expenses and overhead by merging back-office functions, operations, and other fixed costs. This improves efficiency and drives higher profit margins.
Additionally, M&A is a fast way for small businesses to onboard new talent and capabilities. Rather than slowly recruiting, hiring, and training new employees, small companies can immediately integrate an established team through an acquisition. This injects new skills and knowledge into the business.
Challenges of M&A for Small Businesses
Mergers and acquisitions can present many challenges for small businesses. Here are some of the main challenges you should be prepared for when considering an M&A deal:
Valuation and Pricing
Valuing a small private company can be tricky. Small businesses often overvalue themselves, making it hard to agree on a fair deal price. They may also lack the skills and resources to conduct proper valuation analysis. Experienced M&A advisors can help provide a realistic valuation and negotiate a fair price.
Integrating Company Cultures
Combining two companies means blending distinct cultures and ways of working. For small businesses used to operating independently, adapting to new management, systems, and processes can be very disruptive. It’s critical to align cultures through open communication and have a detailed integration plan before the deal closes.
M&A involves added costs like legal, accounting, integration, redundancy, etc. Small companies with limited resources can find these new expenses strain their finances. So, it’s essential to budget for integration costs and understand the full financial impact of the transaction.
With careful planning and expert guidance, small businesses can overcome these challenges and successfully pursue M&A opportunities. But they need to be fully aware of the potential pitfalls.
Conducting Due Diligence
Conducting thorough due diligence is a critical part of any M&A transaction.
Due diligence refers to the careful review and analysis a company does on another company it is considering acquiring. There are several key areas small businesses should focus on during due diligence:
Financial Due Diligence
- Review 3-5 years of financial statements and tax returns
- Analyse revenue streams, profit margins, debt levels, and other financial metrics
- Look for trends and growth opportunities
- Identify any hidden liabilities or risks
Legal Due Diligence
- Review material contracts and agreements
- Assess compliance with regulations
- Look for any pending or threatened litigation
- Ensure intellectual property is properly protected
Operations Due Diligence
- Review business processes and systems
- Assess technology infrastructure
- Determine any integration challenges
- Identify operational efficiencies and synergies
HR and Cultural Due Diligence
- Review employee records, handbooks, compensation, and benefits
- Assess company culture and management styles
- Determine compatibility of the workforce
- Develop a plan to integrate employees and cultures
Conducting thorough due diligence reduces the risk of any unseen issues derailing a deal. It also helps establish an accurate valuation of the target company. While due diligence requires an investment of time and money up front, it pays dividends by ensuring small businesses go into an M&A with their eyes wide open.
Communication with Staff, Suppliers, and Clients
The leadership team must communicate proactively with all stakeholders when transitioning after an M&A deal.
Employees will naturally feel anxious about potential changes, so transparency and frequent updates are essential. Schedule staff meetings or send regular memos to keep employees informed on timelines, organisational changes, job impacts, benefits changes, etc.
Communicate early with primary suppliers to notify them of the transition and discuss any upcoming changes to the supply chain, contracts, etc. Also, contact core clients to inform them about the acquisition or merger. Reassure them that service levels will be maintained and highlight any improvements or new capabilities.
The challenges of integrating two businesses can be daunting, but they are not insurmountable. With the proper planning and execution, small businesses can successfully navigate the M&A process and emerge stronger than ever. Companies can ensure that their new organisation is well-positioned for future growth by focusing on people, processes, and technology.