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Grow Your Business Quickly Through a Vertical Merger

Oct 20, 2009 Business Management

Growing your business quickly can be a challenge. However, growing your business through a vertical merger or acquisition can be done with relative speed, and at a relatively low cost. A vertical merger is about merging with a business in your industry: your suppliers or your customers. For example, a car dealership may want to merge with a small independent insurance broker (to improve onsite insurance services) or a bakery that acquires or merges with a coffee shop (to help sell its baked goods).

Mergers and acquisitions are different. An acquisition is often considered an offensive action; it is a take-over of another company and often that take-over can be hostile. A merger is usually considered a friendlier, defensive maneuver, with both companies agreeing to merge. There is a difference between mergers and acquisitions. A merger is often viewed as a more ‘friendly’ action; a decision amongst both parties to merge together. Mergers and acquisitions accelerate growth, they can be useful if you want to improve your market position (or protect it), and they can help you achieve your strategic objectives for your business in a relatively economical manner. There will always be some challenges in either a merger or acquisition; the most significant challenge is managing the change of blending or acquiring two organizations while still realizing the benefits.

Your business might face the challenges of not only acquiring and/or merging two businesses but also of merging two cultures into one group; of laying-off staff in overlapping or duplicate roles (who goes, who stays); of looking for, and implementing, synergies to improve operating efficiencies; of reducing expenses and increasing revenues; of communicating changes with customers; of strengthening your brand’s reputation; and more. The challenge with a merger or acquisition is that you will need to weigh the pros and cons of decisions quickly, while still keeping a focus on running your business. In deciding whether or not to merge or acquire a company, you will need to assess the costs of managing change and the impacts on your business against the benefits of accelerated growth, reduction of costs and potential for improving market position.

While vertical mergers are about merging with suppliers or customers, horizontal mergers are about merging with, or acquiring, your competition. In a horizontal merger, you might want to buy your competitor to expand your product offering quickly; or to acquire their proprietary product information; or to grow your market share. Or you may be interested in the branch locations that they have (and you don’t) which allow you quick entry into their markets. Consider horizontal mergers if you have an aggressive sales plan and/or an aggressive diversification plan (with diversification, a vertical merger might also work). You need to always keep in mind your strategic plan and your business objectives; but be open to opportunities that are presented to you (for example, a long term supplier wanting to downsize the operation by selling off a division of the company).

Growth through merger or acquisition is inorganic growth and it can be expensive. Make sure that your investment in an acquisition or merger (there are high costs to both) has enough payback to make it worthwhile. Hire a specialist in merger or acquisition accounting to provide a review of your target company before you complete the deal. Organic growth is internal to the business and occurs through sales, product development, production efficiencies, and other internal improvements. There are many key success factors for a successful merger or acquisition. Some of these success indicators are: your business is capable of the change management process that will result from the merger or acquisition; the merger or acquisition aligns with your business plan and is a cost-effective method of increasing your market share; the merger or acquisition provides an opportunity to significantly reduce your costs through synergies and new economies of scale; and the merger or acquisition allows you to improve customer service or to satisfy unhappy customers (for example, by buying a supplier you shortened the lead time required to manufacture the end product).

Mergers and acquisitions have been a popular strategy for business growth over the past decade. A vertical merger strategy can be more successful than an acquisition or horizontal merger because it is not as adversarial in nature and therefore is often managed more successfully. Before you make a decision for inorganic growth, develop your merger acquisition checklist to ensure you understand what it takes to make this strategy a success. Make sure you consider the costs along with the benefits if you are considering mergers or acquisitions as your growth strategy.

To learn more about success factors for a vertical merger; diversification options, and other growth strategies to build and grow your business, visit Kris Bovay’s More For Small Business site.

Tags: Business, business growth, Business Management, business to business, diversification, economies of scale, horizontal merger, leadership, managing, marketing, merger acquisitions, planning, small business, strategy, vertical merger