Mergers and acquisitions in Texas can be an important strategy to fulfill a number of company goals. You could be a small company or a large one, and a merger or acquisition can still benefit you. On the other hand, mistakes during a merger or acquisition are often made, and these can lead to delays, conflict, and litigation.
What Are Mergers and Acquisitions of Small Businesses?
Mergers and acquisitions (M&A) is an umbrella term used to describe when either (1) two or more businesses merge or consolidate, or (2) one business acquires another business.
- A merger is when two businesses combine to form a single entity. To do this, one business absorbs the others' assets and liabilities under its name and the second business shuts down. A merger may help a business reduce its costs and grow its market share. This process is typically mutually beneficial. The two businesses joined as one may choose a new company name that better reflects the new company's mission, or they may choose to maintain one of the companies' names to benefit from brand awareness.
- Under a consolidation, two or more businesses come together to create a new entity that takes on the assets, liabilities, and financial resources of both businesses. Businesses often consolidate to increase profitability and take advantage of cooperation, rather than competition.
- An acquisition occurs when one business buys part or all of a second business' stock or assets. Oftentimes, this process can involve conflict or a hostile takeover. The company acquiring the other business usually keeps its business name, legal structure, and operations. As such, the acquired business legally ceases to exist.
While often discussed in the context of large conglomerates or multinational corporations, M&As can involve businesses of any size, including small businesses.
Before entering into an M&A, it's essential to draft a detailed merger and acquisition agreement.
This document includes important information about the event, such as:
- The businesses' details
- What assets or stock are being purchased
- A list of the assets and liabilities of the business being bought (in an acquisition) or both businesses (in a merger or consolidation)
- The level of access each party will have to the other's financial information for due diligence
- Any other terms of the agreement
This agreement is important and can be a source of profit or problems. At Maldonado Law Group, PLLC, our M&A attorney will review, draft, and negotiate a strong agreement with terms and conditions clearly and thoroughly outlined.
Should Your Small Business Consider M&A in Texas?
There are several reasons why an M&A may be relevant to your small business. A merger or acquisition could allow you to:
- Expand your market share – Merging with or acquiring companies with an existing market share or complementary business can give you access to better growth opportunities, including different geographic markets. By sharing expertise and experience, you can expand your business immediately rather than building a new business from scratch.
- Increase profitability – Combining two smaller businesses may allow you to lower labor costs and take advantage of economies of scale to grow your profits. When companies merge, they can eliminate extraneous staff to reduce labor costs while purchasing raw materials and/or supplies at higher volumes to reduce overall costs. These savings can be passed on to consumers.
- Update a product, service, or business model – If your business is unable to keep up with technological advancements, another business may be interested in acquiring it. This avoids your business from sustaining continued losses. Or you may consider an M&A with another business to access new technologies.
- Engage in corporate restructuring – If you are considering restructuring debts and equity to reduce loan costs, M&As may help you to do so.
- Increase financial resources – When companies merge, they pool their financial resources. This increase in financial leverage may open the door to new investment opportunities.
Entering into an M&A is a significant decision to make in the life of a business, so it's important to carefully reflect on your reasons for doing so.
Five Things to Consider Before a Merger or Acquisition in Texas
In addition to being clear on your goals, there is a range of considerations to turn your mind to before entering into an M&A agreement. Listed below are a few of these considerations.
- Business valuation. If you're considering merging with or acquiring another business, you should first find out how much it's worth. A formal business appraisal will help you assess whether it's worth proceeding.
- Good standing. Before entering into an M&A agreement, you should confirm the parties are in good standing—they are valid and certifiable—in the state where they were formed. If they are not, it may indicate financial issues and lead to problems when filing the necessary M&A paperwork.
- Company culture. When two firms combine or one is acquired by another, there can be a significant disconnect between the cultures. It's important to spend time strategizing how to merge different company cultures to ensure a smooth transition.
- Intellectual property. If you're acquiring a company, you should check its intellectual property assets and whether they are protected by trademarks, copyrights, or patents. Also confirm whether the business you are acquiring has any outstanding intellectual property against it, as these can take a lot of time and resources to resolve.
- Anti-money laundering. If the business you're merging with or acquiring does any business in foreign countries, you must consider anti-money laundering laws and regulations. This includes confirming whether the other business engages with banned individuals or companies.
Even for small businesses, M&As can be complex, lengthy, and potentially risky business transactions requiring a large amount of due diligence. For these reasons, it's worth seeking professional financial and legal advice before entering into an M&A.
