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Mergers and acquisitions play an important role in many smaller to mid-size, privately-held companies. For growth purposes, to address competitive pressures, to acquire needed technology, to address changes in your industry or economic conditions, privately-held companies acquire or merge with other companies in order to remain competitive, accelerate growth or to grow their businesses to the next level. A private company may also sell to a larger private or public company for similar reasons.
Mergers and acquisitions also enable private companies to develop a competitive advantage by increasing their depth of management team, technology and intellectual property, flexibility, growth and shareholder value. The most common reasons for a private company to acquire or merge are strategic growth, talent growth, entering a new geographic market or industry (buy vs. build), address a client concentration issue where one or two clients make up 25-50% or more of revenues, or preparation for an exit.
The following are different types of Private Company M&A Transactions:
Asset Purchase (exclusive of Liabilities)
Small Acquisition for Talent
There are several reasons why private companies choose to expand through growth transactions rather than internal or organic growth. First of all, growth transactions happen much faster whereas organic growth takes time as sales grow. A privately-held company's goal may be to eliminate a competitor, enter a new industry or geographic market, introduce a new product line, acquire key technology, acquire products or services, or bring on the talent and management team that results from a growth transaction.
The following methods can be used to help a private company grow:
Acquisition - A private company acquisition is when a public or private company buys the stock of a private company. An acquisition may also be an "asset purchase", where rather than buying the stock, the buyer simply buys all or a portion of the assets of a private company. The assets may be tangible such as customers, inventory and machinery, and/or intangible assets such as software, patents and trademarks. The acquiring company can exclude all liabilities with an asset purchase (other than specified liabilities for needed items). The selling private company may then continue as a smaller company or dissolve after the sale.
Merger - A private company merger is when two or more private companies combine to form a single entity under a consolidated management and ownership. A merger can take place through a stock swap with one surviving company or through amalgamation or absorption.
Stock Swap Merger - A stock swap can be one method of a merger where one company persists as the surviving company and brand. The surviving company will take on potential added liability so caution must be exercised with a savvy business advisor and corporate transaction attorney.
Amalgamation - An amalgamation is when two or more private companies enter into the merger agreement to form a completely new entity. In this type of merger, both private companies lose their identity and a new private company is formed to manage the consolidated assets. Amalgamation tends to occur when both private companies are of equal size.
Absorption - Absorption is when the merger occurs between two entities of a dissimilar size. In such case, the larger private company absorbs the smaller one. The merger dissolves the smaller private company and places all its assets in control of the larger private company.
Talent Acquisition - An acquisition-by-hire may occur especially when the target private company is quite small or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company, thereby acquiring its talent (if that is its main asset). Certain assets such as technologies and customers may also be acquired, as needed. The target private company simply dissolves and few legal issues are involved.
Strategic Alliance - A strategic alliance can range from a large distributor or reseller marketing and selling your products to a larger alliance with financial backing or special terms, such as a licensing deal, or commitment of annual minimum purchases.
Joint Venture - A joint venture is when two or more companies enter into an agreement to allot a portion of resources towards the achievement of a particular goal over a designated period of time. Synergies occur when businesses capitalize on joint opportunities or other combined efforts to obtain greater results than working alone, whether it is increased revenue or decreased costs.
CEO Advisor, Inc. has the expertise to guide your company through the many steps involved in a merger or acquisition. Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.