Ask Your CPA: Is a Merger with Another Business the Best Way Forward?

To many small and medium businesses in Nashville who survived the pandemic, the worst is not over yet. Economic activity is certainly picking up again in the city, but as any CPA will attest, the road to recovery is strewn with challenges.

If you find yourself in that situation, one of the solutions you can consider is a merger with another business. A merger may offer your business a way forward, and even a good chance to grow and thrive.

However, this move also has many pitfalls, and without the right planning and analysis, could do you more harm than good.

Before undertaking a merger, ask your CPA for professional advice and assistance in going through the process.

These are some of the things you should know.

What is a merger?

As the term implies, a merger is the joining of two or more companies into one. Typically, the merging companies are dissolved and a single new company replaces them. In most cases, a merger takes place between companies with equal sizes and incomes, but a company with bigger earnings may also buy parts or all of a smaller company in an acquisition.

Why should you enter a merger agreement?

Expansion is the most common reason behind mergers. If you’re selling appliances, for example, and want to expand your business to include furniture, you can merge with a furniture company instead of starting your furniture business from scratch. Or if you want to increase your reach and open another location, you can merge with another company that’s already in business at the location you’re eyeing.

Expansion may also come via vertical integration. If you’re a producer, you can merge with a supplier so you can control the acquisition of raw materials and potentially lower your overhead costs.

Two competing businesses may also find a merger to be a good way to consolidate the market, or to be more competitive against larger companies. A business that can’t cope with changes in the market may also realize that the only way to survive is to be purchased by a company with a larger market share or more advanced technology.

What should you watch out for in a merger?

Integrating two or more businesses can be a challenge and lead to disruptions that can negatively impact your profits. To avoid this, ask these questions and don’t enter into an agreement unless you’re satisfied with the answers:

• What’s the best structure for the new company? If the other business is a corporation and yours is a sole proprietorship, the corporation may prefer to purchase your assets as an acquisition. If both businesses are incorporated, are you creating a new corporation that acquires the shares of the merging companies? In making the decision, tax considerations have to be carefully weighed.
• How will authority be divided? Who will have the final decision on certain issues?
• Will you keep your pre-merger brands, or will you start a new one?
• Are you and your potential new partner compatible? Are they someone you can trust and rely on over the life of the business?

To help you make the best decision, consult with your CPA and other professionals who can provide you with objective and informed guidance on the matter.

Sources:

How to Merge Two Small Businesses, BizFluent.com
Should You Merge Your Business?, GeekWire.com