Managing a business can be highly rewarding. Starting a business from scratch can be a long-winded process, but it typically costs less than acquiring an existing business and offers greater flexibility. Buying an existing business means you can hit the ground running but does take greater capital investment. And, if you already have a business but are looking to expand, a merger could be the most practical solution.
Mergers
A merger occurs when two businesses combine to form a single entity. Both companies basically cease to exist and are replaced by a single merged entity. (source: https://infinitymerge.com/)
Pros
1. Minimize Competition – Merging with a competitor means that you can effectively eliminate one competing business. No need to outmarket or outperform another business if you can join with it to create something new.
2. Save Money – Acquiring an existing business outright can be expensive, and the high costs can be prohibitive. This is especially true if your current business is still quite new and has not had a chance to build up capital yet.
3. Improve Efficiency – When two companies merge, their business processes, departments, and other elements of the business are usually merged. This can lead to greater efficiency.
4. Grow Your Team And Assets – A merger is also a great way to benefit from the talent pool already in place at another business. Their creative teams, sales professionals, and executives will join with yours.
Cons
1. Culture Clash – Different companies can have different processes, different ways of business, and different company ethos. Trying to combine them can lead to a culture clash, which will need working out.
2. Potential Job Losses
There will be overlap between the two companies. You’re unlikely to need to double the size of your HR department and may not even need twice the sales department. This can lead to job losses and redundancies, typically made up of both groups.
Acquisitions
An acquisition occurs when one business buys another. The company that is bought out ceases to exist, but the buyer remains. This can be beneficial when one of the two businesses has a much stronger brand reputation than the other. An acquisition might also refer to the purchase of an existing company, rather than the establishment of a new one.
Pros
1. Existing Customer Base – Although you may lose some customers following the acquisition, buying another company is generally the quickest way to gain access to their customer base, making it an effective way to grow your business.
2. Less Risk – Buying a business from scratch carries a lot of risks, and there will be a lot of challenges, especially in the early days. An existing company has already gone through a lot of these challenges, reducing your risk exposure.
3. Existing Relationships – Acquiring a business means taking its stock and assets, which includes relationships with customers, clients, suppliers, and other stakeholders. Buying these relationships can save time compared to nurturing them afresh.
Cons
1. Expensive – The most obvious con of acquiring an existing company is the cost. Buying a business is not cheap, and cost is generally determined by revenues and asset values.
2. Some Limits to Flexibility – Buying a business means taking on its processes, as well as its relationships with suppliers and stakeholders. While there may be some room for changes and movement in these areas, there is some limit to the flexibility offered with this type of deal.
Starting A New Business
If you don’t have an existing business, setting one up from scratch is a possibility. It does take a long time and carries a high risk but it also offers the greatest flexibility and lowest costs.
Pros
1. Less Expensive Than Buying One – There will be costs associated with setting up a business, but these costs are usually lower, and more spread out than acquiring an existing entity.
2. Freedom – When you set up a new business, it’s your business. You have the freedom to develop your own products and services, market them how you like, and implement your own processes and procedures.
Cons
1. High Risk – Setting up a new business means the company will not make money initially. It can take years before it returns a profit. And, you may have some legal and financial ties to the company which means you soak up some of its failure or loss.
2. Finite Resources – You can’t simply throw every penny at a new business, or it will never become profitable. When you first start out, everything from premises to materials will be in limited supply.
3. Time Consuming – Starting a new business means taking on a variety of roles that don’t necessarily align with your specific skills. It also means investing a lot of time, to make up for the lack of reputation and resources.
Conclusion
Setting up a new business can be stressful and challenging, but it offers greater freedom than mergers and acquisitions. Acquisitions require a lot of initial outlay, while a merger requires that you have a business to merge with in the first place.
