How to Merge Two Small Businesses

Small business is a difficult road to ride, and it’s not uncommon to want to change things up along the journey. Taking on a partner, diversifying, downsizing or even merging can all be attractive ideas. Merging two small businesses is done for all kinds of reasons, but whatever the motivations are, there are numerous factors to watch out for, since some studies say as many as 70 to 90 percent of small business mergers fail.

By joining with another company, there are several perks you might gain. Some of these include:

• An opportunity to get better office space in a world where office occupancy demands are increasing at 1.3 times the rate of new space coming available.
• Gaining access to a new customer base.
• Being able to expand your services to make your company’s offerings more comprehensive and more competitive.
• Reducing overhead costs.
• Gain a partner who can help offload some stress while potentially improving work/life balance with shared responsibilities.

There are great pros to joining forces, but before you go signing that small business merger agreement, you’ve got to think long and hard, because mergers can go terribly awry. The stakes are high but so are the costs in merging, when decisions must be made on everything from rebranding to divvying up the power structure.

Here are four questions you’ll need to ask (and answer) before you make that merger.

1. Do you like your new potential partner? Seriously, you’ll need to enjoy working with them and feel like you can confide in them and trust them, because there’s a lot riding on this. The last thing you need is regretting partnering up. Do your homework.
2. How will you divide the power? Who gets the final say, and are you prepared to make that legally binding? There’s no shortage of mergers that have collapsed due to a butting of the heads.
3. Will assets be sold or stock changing hands during the merger? If so, planning well can help limit your tax liabilities – and failing to plan could be costly.
4. Who are you now? Should one of you adopt the other’s brand, or should you start fresh with a new brand?

Doing homework is a huge part of successful mergers. Here’s a list of tasks before you move ahead.

• Talk to a few of your clients to see if the added services would appeal to them or make them less likely to remain loyal to you.
• Test your management compatibility by having a few hypothetical and real business situations to make decisions on. Have each partner make their decisions and consider having a consultant observe the process to give feedback on how well you’ve worked together.
• Check the books. Pie-in-the-sky expectations usually go splat when companies realize their profitability is hurt in the initial merger phase. Can you survive six months of reduced sales as you get back up to speed?
• Consider the culture. Each company will have its own corporate culture. Will they blend well? Can each team adapt to the other? Doing test projects with blended teams can give insight into how well each company’s employees will handle the merger. Turnover is a very real consequence in mergers.

Don’t think that you can do this all on your own, because mergers are complicated. Blending companies together can involve stocks, assets, real estate, profit sharing, control aspects and much more.

By consulting a lawyer who specializes in mergers and a tax accountant who does the same, you can protect yourself and the company from financial and strategic errors. Also useful is a business consultant to help navigate branding and culture struggles.