Expanding your business through mergers and acquisitions
Purchasing or merging with a smaller business can be a powerful way to expand your company’s reach. However, it’s crucial to take extra precautions to protect your established business throughout the process.
Key Differences Between Mergers and Acquisitions
Although mergers and acquisitions share some similarities, there are fundamental differences between the two.
In a merger, two separate companies merge into a new legal entity. This is a rare occurrence, as it’s not often that two equivalent companies can mutually benefit from merging their resources and personnel, including their CEOs.
Acquisitions, on the other hand, do not result in the creation of a new company. Rather, the acquiring company fully absorbs the acquired company, which can sometimes lead to the acquired company’s liquidation. Acquiring a business is similar to buying an established business or franchise.
Determine the Other Company’s Value
Before agreeing to a sale, it’s important to assess the other company’s value through a business evaluation, which is the same process used to determine your own company’s value when selling or closing it.
Numerous methods exist to evaluate a business, so if you decide to conduct the evaluation yourself, be sure to research the methods thoroughly. Alternatively, consider hiring a qualified business evaluator. Once you’ve established the other company’s value, you’ll know whether you can purchase it outright or whether you need to raise additional funds.
Establish a Merger or Acquisition Agreement
To proceed with a sale or merger, you must prepare a sales agreement that allows for the acquisition of assets or shares of a corporation. It’s important to have an attorney review the document to ensure its accuracy and completeness.
List all inventory at the sale along with the names of the businesses and their owners. Include relevant background information, and determine how the business will operate prior to closing and the degree of access each company will have to financial information. Write down all adjustments, brokerage fees, and any other relevant terms of the agreement.
Be sure to include all goods and obligations to avoid potential problems after the sale is finalized.
Transfer Business Ownership
The agreement’s terms will dictate the steps for transferring ownership and what ownership will look like. It’s highly recommended to seek the help of an attorney during this process.
After the merger or acquisition is complete, you’ll need to file these changes with the state in accordance with state and business structure laws.
If the merger requires dissolving your original company and creating a new one, you may also need to open a new business bank account, obtain new state and federal tax IDs, reapply for licenses and permits, and take steps to legally close the old company.