What Are the Advantages of Operating as a Separate Entity vs. a Merger?
Business owners occasionally have opportunities to buy or merge with another business, expanding their sales base, reducing costs and adding or combining processes, expert staff, products and technologies. In some cases, it’s better to operate the two businesses under different names and with different offices, while in other situations, combining the two companies makes more sense.
Merging two companies helps reduce costs by eliminating one set of functions, such as human resources, accounting and marketing. Adding the sales of two companies and eliminating half the overhead costs produces bigger profits. If the companies make similar products, they can further reduce expenses by combining all or part of their production operations. If the businesses operate as stand-alone companies, they might still share some expenses, making each more profitable. Even if this results in a competitive advantage for one of the businesses, the parent corporation makes all of the increased profits.
When two businesses combine, it’s rare that it’s done on an equal business. One company usually takes the lead as the remaining entity, requiring the subordinate company to adapt to its workplace policies and procedures. One set of employees might find itself with a new dress code, required weekly meetings, stricter rules on breaks and personal use of computers and twice monthly -- instead of weekly -- paydays. This can cause friction between the old and new staff. On the other hand, a merger can also help companies learn each other’s culture and combine the best of both to create a new set of workplace rules and procedures that strengthen both units. Keeping the companies completely separate prevents morale problems a culture change can bring and a temporary decrease in productivity as employees get used to the new culture or leave for greener pastures.
If one company has a stronger presence in the marketplace than another, merging the two companies under the stronger name expands the strong company’s presence in the marketplace and eliminates the weaker competitor. Although one brand might not be as strong as the other, it still might be preferred by enough companies to keep the businesses separate. In this case, merging the two companies might send the customers of the weaker business to your competitors. If both brands are strong, operating the two companies as separate entities with leaner operations makes more sense.
If a public relations problem -- such as a quality control problem, lawsuit or management misbehavior -- damages a company, two businesses operating under the same name are both damaged. If they remain separate, one company has a better chance of survival. If a business wants to try a new product or service, it can test it at a separate business with less risk than introducing it at both outlets. If the product is a flop, only one business is associated with it.
If a company decides to merge with a competitor because both are struggling and they decide to operate separately, each can continue to operate as its owners see fit. Even if they operate under the same name, each can manage its half of the company its own way, with some restrictions on the products and prices each offers. If a stronger company merges with a weaker business, it's clearly in charge and might face less resistance to its orders from employees at the merged company.