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Merger and Acquisition Archetypes

On Behalf of | Apr 26, 2019 | Business Law, Contract Law

There are many ways to help your business’s bottom line. One of the fastest ways to achieve this goal, if done correctly, is through mergers and acquisitions. You’ve probably heard of the term before, and have a general understanding of what happens to companies when this occurs, but what exactly happens when a company merges with another or is acquired? The answer to that depends on the goals of the businesses involved. In this blog, we’ll cover the options you have to consider as it relates to structuring your business entity for a merger or acquisition.

Why do companies decide to merge or acquire a business and how do they structure the business once that’s decided? Companies do not (or at least should not) proceed with these actions for vague concepts like corporation growth or strategic positioning. While those are important, there should be a specific target in mind when owners begin this process. Business owners should also establish a detailed measurement for success when beginning the process. This process is complex but can create immediate value once executed correctly. If a company is considering merging or acquiring a business, then one of the following structures may apply.

Let’s start with a true merger. This happens when two companies, often the same size and industry, agree to go forward as a single new company rather than being owned and operated separately. This also means they would go through the formal process of submitting a merger application with the State of Nevada. Both companies’ stocks or membership interests are surrendered, and new company stock or interests is issued in their place. There are many reasons for companies to merge, and some are definitely more complex than others, but the principal goal for the mergers often remain the same. One reason to merge would be to improve market reach and visibility. Expanding your market can quickly give your business new sales opportunities. This new business may have been inaccessible for some reason prior to merging. Whether it was logistics, cost, or man power – bigger companies often have an easier time conducting business due to having more capital. You also have to consider economies of scale; larger companies can save on costs just because they have more purchasing power. Negotiating prices from basic office supplies to large equipment becomes more favorable the bigger your company gets. There may be some synergy issues, but a merger can cut down costs considerably in a quick amount of time.

The other option for a merger would involve both companies agreeing to form a parent entity and agreeing to manage the parent entity as equal managing members. This option can provide more flexibility, but also more work, when structuring your business. Agreements between the companies’ status should be in place and there should be governing documents that point out each of the members’ responsibilities as well. You normally see this occur in a Vertical Merger. Think of a food service company partnering with an agricultural business. The benefits to this merger include acquiring new technology, intellectual property, or even current licensing or permit access that is not easily attainable. It may even fill critical gaps in service which would allow your company to provide a more robust service offering.

There are many benefits to acquiring a business. Even the reasons mentioned previously for company mergers can apply in an acquisition. Acquisitions are a valid cost-effective way for acquiring new tech and processes or even increase scalability for capital. The benefit of a complete acquisition is not having to worry about another companies interests which makes it a more appealing option. The more aggressive acquisitions seek to remove competitors and excess capacity in a specific industry. However, it may be hard to find the right company to acquire; especially if it is a company you are looking to invest in. If you can find a good company early enough in a new industry and have the patience to provide it with the development it would need to flourish, then you can carve out valuable market space before that industry matures. It’s not always going to be easy, however. Acquisitions almost always have synergy and company culture issues. Furthermore, it can become difficult and time consuming to provide a package appealing enough to be able to get the deal done.

Mergers and acquisitions can get complicated before, during, and even after the process. Make sure to consult with an experienced Nevada business attorney to help you through a business merger or acquisition. One meeting can save you months or years of having to deal with a mismanaged business transaction.

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