Terrible Merger Traps To Avoid

Barbara Weltman Mergers and acquisitions are among the principle ways in which Fortune 500 companies grow. Small-business owners can take a lesson from these companies if they want to expand. If you do so, however, there are certain traps you must avoid.

Finding a good fit
Trap: Failing to reach a meeting of the minds.Each owner may have an initial idea of what he or she wants to accomplish with the merger, but together they may fail to flesh out the details to achieve their goals. For instance, on e may be older and views the merger as an eventual exit strategy. That’s fine, but this can mean the older owner may have a conservative approach to the business and may not want to spend money on expansion. The younger owner may be more willing to take risks and may disagree on company direction in this situation. If both owners have failed to discuss their expectations candidly, they will probably become frustrated and unhappy after the deal has closed, which can undermine the success of the merged business.

Trap: The inability to mix company cultures.Often small-business mergers are motivated by the desire to increase company assets. One company may have very talented personnel; the other has more name recognition, which can translate into greater marketing success. Or one company may bring capital to the table that the other needs for expansion. Even though on paper a merger may seem like a good idea, owners and employees of the two companies may not mix well. One team may be used to autonomy; the other may thrive under micromanaging. Make sure that your proposed marriage with another business won’t suffer from incompatibility.

Trap: Failing to clearly establish who gets what.Rarely is a merger a 50-50 proposition. Carefully allocate each owner’s percentage before committing to the merger.

Trap: The inability of one owner to cede the last word. One of the key issues for small-business owners when two companies merge is who will call the shots. Until the merger, each owner has been supreme within his or her company. Decide who will be in charge when the merger is completed. Make sure each owner knows which one has the final say.

other issues to settle before the merger include:

  • Company name. Will one name survive? Will you create a new name?

  • Positions on the company board. Whether you have a board of directors for your corporation or an informal board of advisors for another type of entity, decide in advance how many representatives each former company will have on the new board.

  • Staff retention. When companies merge, there is duplication of functions – you don’t necessarily need two receptionists for your new combined office. There can only be one head of sales. Negotiate before closing the merger who will stay and who will have to leave.

    The unknown
    Trap: Failing to bring in professionals at the outset.Small-business owners may shake hands on a deal before even talking with their accountants and attorneys about the merger. This mistake can be critical, says David Rubenstein, CPA, who is a partner in the accounting firm of Weiser LLP in New York City (www.weserLLP.com), which specializes in mergers and acquisitions of small and mid-size companies. Rubenstein notes that owners often fail to think through the structure of the deal: Are assets being sold? Is stock changing hands? These and other technical issues can have an impact on the tax treatment of the transaction and cost owners money that could have been saved with better planning. The few dollars the business owner hopes to save by delaying the involvement of professionals can wind up costing thousands of dollars or more in missed opportunities.

    Trap: Incurring unanticipated liabilities. What you don’t know can hurt you in a merger. When deciding whether to merge with another company, be sure to do your due diligence and check for any debts, judgments (or potential judgments), payroll and other taxes, contracts with suppliers, employment contracts with staff and other obligations you may incur.

    If your company has one type of retirement plan and the other has a different type of retirement plan and the other has a different type of plan, decide which plan will be used by the new company.

    Final word
    You don’t necessarily have to merge in order to grow your business. You can gain many of the advantages that a merger offers while retaining your autonomy simply by deciding to work closely with another company. You can accomplish this co-enterprise through a joint venture in which you contractually agree to work together on specific projects or in certain areas and to split the profits from these activities. Again, talk with your professional advisors before proceeding.

    Copyright © 2005 by BWideas.com, Inc.

    Category: Negotiating
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