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Combinations For Growth

If your company has decided the best way to grow is to expand your ownership boundaries, you are probably considering either a merger or an acquisition. Both are convenient, quick ways to grow and they both have advantages and disadvantages. But the legalities and tax outcomes of these two transactions can be very different.

First, here are the basic differences between the two types of transactions:

  • Mergers generally involve taking control of another corporation's business by issuing stock to the target company's shareholders. Then, they wind up owning part of the combined company. You can often structure a merger as a tax-free transaction for both parties.

  • Acquisitions generally involve buying the target's stock or assets in a taxable transaction for cash, debt or a combination. Your company won't owe income taxes but the target or its shareholders might.

Once you get past the basic differences, focus on the big picture: What you hope to achieve by combining your operations with those of another company? Among the goals commonly considered are:

  • Gaining an immediate foothold. Your company can instantly step into an appealing geographic market, or start a new line of business without the uncertainty, expense and time involved in starting from scratch.

  • Exploiting a niche. Your company can exploit a market niche that is compatible with your existing business. This can allow both businesses to grow faster and generate more sales with less effort and marketing expense.

  • Reaping economies of scale. You can expand your company's current sales and operating profits without a proportionate increase in indirect costs such as corporate overhead, office space and equipment. This enhances profitability.

  • Reducing competition. You acquire a regional or local competitor and effectively eliminate it, gaining greater pricing power. That translates into higher profits.

  • Benefiting from size. Larger companies find it easier to obtain favorable financing, attract new equity investors, and craft more-advantageous deals with vendors and suppliers. Some people simply take larger businesses more seriously. Being bigger also levels the playing field with competitors and gives a company more margin for error during economic downturns.

While mergers and acquisitions can be compelling, there are potential pitfalls. Consult with an M&A professional about:

  • Tax advice

  • Obtaining a valuation of the target company

  • Due diligence to help ensure you avoid any unanticipated liabilities

  • Advice on compensation packages for valuable employees you wish to retain at the target company

  • Help with ideas that are important to consider before drafting new non-compete agreements.

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