How to Merge Corporations

If you’re a business owner looking to position your company for competitive success after you retire, a merger could be your solution. A merger is an opportunity for the company you’ve built to gain fresh momentum for a new era by joining forces with another business. It also allows for restructuring as a way to transition out of your active ownership role. Learn how to merge two corporations with an eye on your retirement exit.

1. Clarify Whether You Want a Merger or an Acquisition

Though we often mention them in the same breath, mergers and acquisitions are two different strategies.

An acquisition involves one company taking over another. The owner of the acquired business may get to make a favorable exit, but the acquiring company is in a position of power and initiates the acquisition for its benefit. This often plays out when a larger company buys a smaller one and absorbs the smaller company’s assets and resources.

A merger involves two companies agreeing to combine for mutual benefit. They combine all their assets and liabilities, aiming for a higher valuation and healthier financial situation than either had alone. The resulting combined company may be registered as a new entity. Usually, both entrepreneurs continue in the new business, but a merger could be a strategic way for one or both to exit.

This article will help you navigate a merger to set your business and yourself up for financial security as you approach retirement. Understand that this is a different strategy from acquiring another business or allowing another company to acquire yours.

2. Decide Which Type of Merger You Want

Once you know you are looking for a merger rather than an acquisition, think about the type of merger you want. Here are the five main types of mergers:

• Conglomerate mergers: These happen when two companies in different industries merge. The combined business may gain resources, efficiency, and product diversification.
• Horizontal mergers: These involve two competing companies in the same industry merging, which benefits both by reducing competition.
• Vertical mergers: When two companies at different points in the same supply chain merge, the result is a vertical merger. This helps both save costs and streamline operations.
• Product extension mergers: These mergers combine two companies that are not competing but offer related products to a similar customer base. For example, a makeup company and a skincare company could execute this type of merger to reach more customers, improve production efficiency, and increase revenue.
• Market extension mergers: These are mergers between companies selling the same product to different markets. For example, similar businesses serving different states or countries could merge. They give both businesses access to new markets and resources for increased revenue.

Analyze your industry’s competitive landscape, your supply chain, and your market to find the type of merger opportunity that best serves your business’s strategic interests. Once you’ve decided that, you can identify a potential company or companies to merge with and conduct your due diligence.

3. Conduct Due Diligence

You’ve been in business for a while, so you know due diligence is necessary for mergers, acquisitions, and investments. However, conversations in business circles often leave out many details you should study before merging with another business. Here are 10 things you and a fellow business owner should know about each other’s companies before merging:

• Finances: Inspect their tax returns, income statements, cash flow statements, and balance sheets.
• Costs: Request a breakdown of their cost of sales, operating expenses, and other costs.
• Valuation: Get a formal, up-to-date business valuation report.
• Assets: Obtain a list of all business assets, tangible and intangible.
• Properties: Ask for a list of any real estate the company owns or has investments in, along with valuations.
• Customers: Check customer relationship management data to understand the existing customer base.
• Employees: Find out how many employees they have, their roles, and their compensation and benefits.
• Litigation: If the company has any open or pending lawsuits, you need to know about them.
• Locations: Understand where the company is authorized to do business and where it currently trades.
• Documentation: Gather any other relevant documents, such as articles of incorporation and bylaws.

4. Agree to Merger Terms

Once you have approached a potential partner company about a merger and are both satisfied with your due diligence findings, it’s time to create and sign a merger agreement. Before the merger goes through, you must agree on key terms like:

• Structure: Determine the legal structure of your combined enterprise. A true merger often creates a consolidated entity that dissolves both original companies and absorbs all their assets and liabilities. Seek legal and strategic advice to understand the implications of potential legal structures and choose the right one for this merger.
• Leadership: Clarify how each company’s directors, executives, and managers will fit into a new, integrated structure.
• Redundancies: Evaluate any redundancies across departments, functions, and employees. If terminating anyone’s employment will be necessary, agree on how you will approach making and executing these decisions.
• Branding: Choose the new company’s name and branding. The new entity could retain one of the former companies’ branding, combine both, or create a new brand identity.
• Termination: Set conditions for a valid dissolution of the merger. Clarify who has the authority to terminate it and how they can do so.
• Valuation: Document each company’s valuation at the time of the merger with third-party valuations and a clear statement of the valuation methods.
• Funding: Executing this merger and any restructuring, rebranding, and operational changes will cost money. Before finalizing the merger, agree on how you will fund it.

5. Complete Your Exit

If this merger is part of your retirement exit strategy, the last step is to complete your exit. Although it’s the last step you’ll execute, you should be transparent about your intentions leading up to the merger agreement so both parties are on the same page. Depending on your goals and how they align with those of the other party, you could approach your exit a few different ways, including:

• Sell the entire merged entity and share the proceeds with your co-owner.
• Sell your shares to your co-owner and transition out of active involvement in the company.
• Retain some equity, perhaps as non-voting shares, but transition out of active involvement.

Seek professional business advice and financial planning services to help you choose the right strategy to prepare for the next phase of your life through this merger.

Choose Fort Pitt Capital Group for Exit Planning Support

If you want to set up your retirement exit through a merger, you have many moving parts on your mind. You’re thinking about your business, the other business, the consolidated entity, and your personal financial future. You know your business better than anyone else, but it’s worth enjoying professional guidance to secure your legacy through a well-executed merger. Fort Pitt Capital Group is here to help.

Fort Pitt’s Certified Exit Planning Advisor (CEPA) will work with you to plan every step of a smooth exit. Our advisor specializes in creating exit plans that align your business, financial, and personal goals for peace of mind when you retire.

Contact us to speak to our helpful team about your merger, exit, and retirement plans.