Vertical Mergers are an Effective Strategy for Growing Your Business

How to grow your business quickly, and at low cost? Through a vertical merger or acquisition. When a business merges or acquires another business in its vertical supply chain, it is growing through vertical merger or vertical acquisition. Examples of this type of merger are: a radio station that merges with an advertising agency; a dairy farmer who merges with a dairy products plant; a winery that acquires or mergers with a specialty wine store; and more. These merger acquisitions examples demonstrate the relationship between businesses in a supply chain.

The difference between mergers and acquisitions is often not well understood. A merger is when two businesses merge operations, usually on a voluntary basis. The goal is to achieve a win-win for both businesses. An acquisition is where one business acquires or buys the other. The goal of the business buying the other business is to win; that doesn’t mean the other business has to lose but that is the common outcome. Your business can grow through both merger and acquisition, however it is important that your growth plans accommodate the challenge of managing changes that will result from merging with, or acquiring, another business and still realize your strategic plan.

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.

In addition to vertical mergers and acquisitions, you need to understand horizontal mergers. A horizontal merger is where you merge with (or acquire) a competitor. You may want to add their customers to your ‘sales book’ or to buy their strengths (which might be a weakness for your business). If your strategic plan is to build a diversified business (and there are some significant advantages to diversification), it is much faster to merge or acquire than it is to build it internally. For example, the company you have targeted might have developed a new product development process that results in a very successful new product launch program. Or they may have better geographic locations or branches that will enable you to grow your sales quickly. Perhaps the target company has successfully entered a new market you are interested in; or won a new long-term key account contract. These are all reasons to consider a horizontal merger.

Growing your business through acquisition or merger is inorganic growth; and it can be an expensive strategy so you need to ensure that this investment pays off. Whereas organic growth is internal to your business and it occurs through internal improvements, operation efficiencies, new product development and sales. There are numerous key success indicators for a valuable acquisition or successful merger. Some of these success factors are: the acquisition or merger offers the opportunity to reduce costs significantly through economies of scale and new synergies; the acquisition or merger allows you to satisfy customers that were unhappy with the existing service (for example, by acquiring a competitor you gain more staff to improve your service); your business is able to manage the change processes necessary to integrate two businesses successfully; the acquisition and merger will help your business increase market share in a cost effective manner; the acquisition and merger is strategically aligned with your business plan. Before you decide on an inorganic growth strategy, hire an accountant to handle the merger or acquisition accounting.

Acquisitions and mergers have become popular over the past 10 years. Companies are looking for the economies of scale that ‘size’ will give them. Vertical mergers often have a higher rate of success because they are not as adversarial in nature (they’re not offensive) and managing the change process, while challenging, is more successful. If you are considering a merger or acquisition, analyze the costs and benefits carefully (develop a merger acquisition checklist) and consider your ability to manage the process.

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