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In today’s digitized era, establishing a business has become effortless. Entrepreneurs only have to devise a sustainable business idea, find investors, hire professionals, and kickstart the venture. However, things become challenging when you want to grow the business. Some entrepreneurs expand clientele while others bring new products to the market. Even though these strategies cost a lot of money, they don’t promise profitable returns.
So, you must be wondering what the most reliable way of growing a business is? There are two options. You can either merge with an existing business or acquire a profitable company. Let us explain how? A merger happens when two companies join hands together and work as a single unit. For instance, a beverage manufacturer might merge with a confectionary company. It will give both companies access to new clients, generating higher profits.
On the other hand, an acquisition means buying another company. If you sell fashion wear, you can buy a cloth manufacturing company to enjoy a lower cost of sales (COGS). Depending on where your business stands in the industry, you can choose to merge or acquire. Both these strategies have advantages and drawbacks; hence, select the one that aligns with your business model.
Here we are listing a few pros and cons of mergers and acquisitions.
Mergers
In a merger situation, two companies are involved who share the same business interests. They merge by forming a new name, streamlining operations, redrafting policies and procedures, and building a cohesive vision and mission. But before you take the initiative, ensure to have experts on board who are well-versed in executing merger strategies. Business experts with online MBA no GMAT academic credentials are competent individuals possessing relevant and latest knowledge about the corporate world. They’ll help you map out the merger strategy, fulfill legal requirements, train employees, overcome any loopholes, and align both the organizations’ goals. Since these individuals pursue online education, they gain industry exposure side-by-side, making them a top pick for companies looking for industry experts.
Pros of Mergers
1. Economies of Scale: When two businesses merge, they combine all their resources. Thus, they need more material and supplies to run operations smoothly. As a result, companies can purchase supplies at higher volumes and improve their scale through lower costs. They can also pass these low costs to end customers or enjoy higher profits themselves.
2. Increases Market Share: The two merging businesses can benefit from one another’s customer pool, allowing them to acquire a more significant chunk of the market. It increases market share and enables the business to get ahead of its competitors.
3. Enables Risk Sharing: It has become challenging to take risks in today’s volatile business environment. Fortunately, mergers enable risk-sharing as both companies take risk exposure. It protects them from substantial losses, securing their financial future.
4. Avoids Replication: If you merge with a company producing the same products as yours, it can eliminate competition. Both entrepreneurs can work collaboratively in the best interest of the customers.
5. Promotes Diversification: In a merger where two firms in different industries join hands, you can diversify the business model. It will help you access knowledge that applies to another segment/niche, increasing reach.
Cons of Mergers
1. Less Choice for Customers: A merger can lead to less choice for the consumer since two businesses/brands are producing the same products and services.
2. Job Losses: Although companies combine their resources when merging, they also lay off many workers. After all, they no longer need multiple finances, human resources, or supply chain managers.
3. Loss of Brand Image: As both companies have to form a new entity, they also have to develop their goodwill from scratch. They have to inform customers about the new brand name and create brand awareness again.
Acquisition
In business terminology, acquisition refers to buying a large portion of a company’s shares to control it. The buyer purchases the shares and some of its assets as part of the agreement. However, acquisitions can take a long time and exhaust the resources of the buying organization. Let’s have a look at the following pros and cons.
Pros of Acquisition
1. Better Tax Options: Entrepreneurs buying a company in another region can reap the benefits of tax advantages. You must ensure the target company is in a strategic sector with a sound tax system and generate higher returns.
2. The synergy of Core Competencies: You might enjoy competency in production technology while the company you acquire has an extensive distribution network. That way, you can integrate both competencies and benefit from them.
3. Cost Reduction: The acquiring entity can take advantage of economies of scope. You can syndicate the production process of the target company and benefit from a lower cost of raw materials. In addition, this can also reduce the risks and costs of launching new products.
4. Overcomes Time Loss: Setting up a new company takes a lot of time, effort, and capital. But, buying an already established company with a running production, brand name, and other intangible assets is more feasible. These things will come in handy as you won’t have to build from scratch. Right after the acquisition, you will achieve a strong position in the market.
5. Increases Market Power: You can buy one of your competitors to increase market power and share. A larger market share in hand will increase your bargaining power over suppliers and customers.
Cons of Acquisition
1. Financial Fallout: In acquisitions, companies often pay prices far higher than the market value of the target company. It leads to substantial losses as the company isn’t worth the money you spent on it.
2. Integration Issues: Unfortunately, integration of the acquired organization can bring many challenges. Perhaps, there could be a cultural clash, or employees may resent acquisitions. Running a business can become a challenge with such situations on hand.
3. Operational Disruptions: Usually, acquisitions face many problems, and at times, completion stretches longer than anticipated. As a result, the managerial focus is diverted from daily operations and internal development.
Final Thoughts
Businesses that don’t have financial constraints may opt for acquisition as it requires enormous capital, whereas others can think of merging. A merger is the best choice for entrepreneurs who don’t mind sharing ownership with another person/shareholder. You have to compare the pros and cons of both options against your business model to mark you success. It will help you decide which option aligns with your business goals, strategies, and financial standing.
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