Business owners enter into mergers with other companies to attain various objectives. The year 2020 has seen a spurt in the number of M&A activities. A survey conducted by Deloitte on 1,000 corporate participants found that close to 63% of the respondents predict a rise in the number of mergers and acquisitions this year. If you’ve been considering a change in the business model, you’ll want to approach the process carefully. Here are some of the critical factors to keep in mind before entering into a merger.

Understanding How Mergers Work

When two company owners agree to combine their businesses, the deal is called a merger. Typically, both companies are almost equal in size and profit margins, which is why the process is also called a “merger of equals.”

Once the merger is complete, both participating companies cease to exist and a new company is established. The entire process is complex and needs approval from the respective boards of directors and shareholders. Several objectives are attained from such deals such as gaining market share from competing brands, lowering the cost of operations, and expanding the customer base and scope of operations.

This isn’t always the best option. After a careful assessment, some business owners will realize that instead, it’s time to figure out how to sell your company. Before you finalize your decision for the merger, here are a few essential factors to keep in mind:

1.   Financials of Both Companies Must be Explored

Expert companies such as Inuit Quickbooks stress the need for due diligence by conducting a detailed analysis of the financials. Take the time to evaluate debts, liabilities, and assets. Bring in a certified accountant who can identify any critical losses, gains, or taxation issues that could affect the future company’s health. Having examined all statements and documents, you’ll arrive at an accurate value of the targeted company, allowing you to make a better informed decision.

2.   Future Leadership and Board of Directors Must be Outlined

Discuss the organizational hierarchy of the current companies and clearly outline the decision-making processes. You’ll want to work out the new board of directors and elect the officers who will be invited to continue working at the managerial level. If you would prefer to have specific individuals on board, now is a good time to discuss what you’re expecting to see. Also, discuss the overall structure and determine which business owner will be at the helm taking control of the new company.

3.   Evaluation of the Operating Costs Must be Conducted

Check the balance sheet, income statements, and cash flows of the company with which you intend to merge. Oftentimes, businesses are running up significant operating costs or have a high weighted average cost of capital. Merging with such companies might affect your productivity and affect the long-term success of the new venture.

You’ll also want to check if any additional purchases are needed and if you’ll need to invest in purchasing equipment to maintain operations. For instance, given the increased risk of data breaches and threats to cybersecurity, you might need to divert funds toward security solutions for the new company. Get estimates of the expected costs, and if a high influx of capital is required, you may want to rethink your decision.

4.   New Brand Name Must be Determined

At this point, your objectives behind the merger come into play. Some business owners choose to merge with an established brand to provide a wider selection of products and services to their customers. Others consider mergers with competing brands for a more the effective market impact, or to develop an edge by taking over a local brand that has a dedicated clientele. If you hope to cash in on the success of the brand name, you’ll consider adopting the logo, slogans, and other advertising strategies, and thus, maintain the existing goodwill and identity earned by the brand.

Proceeding with a merger must be approached with caution, and as a business owner, it is critical to evaluate the pros and cons before signing on the dotted line. Conducting due diligence at the onset can ensure the future success of the new company. You’ll also confirm that you not just maintain, but also ensure productivity, profitability, and sustained growth and expansion.