If there be any opposed, speak now or forever hold your peace! The hardest thing to do in business is take on a business partner. Just like a marriage, they get integrated into your life and become your second half. You share business resources, you share control, and you share the finances. I can’t flat out say whether or not it’s a good idea because there are way too many variables, but I can get you to ask yourself the important questions to see if a merger and a business partner is right for you.
What is my long-term goal with the business?
The biggest question you need to ask yourself is “What is my long-term goal with this business?” This question is vital to understanding whether a merger is right for you. As the famous scene in Alice in Wonderland shows, “It doesn’t matter which way you go.” If you don’t care where you are going. You need to know where you want to take this business and what it’s purpose is for the future. Are you trying to build it up to sell it? Are you trying to create a passive income stream? Are you going to use the business as your retirement plan? How much revenue would you consider to be successful? Are you going to use this business as a platform to jump into another business? Whatever you do, figure out what your long-term goal with the business is. This will help you calibrate your compass and point you in the right direction. Answering this question might just be enough to help you decide if the merger is worth it.
Once you’ve figured out your long-term goal the next question to ask is “How will this merger help me with my long-term goal?” If you can’t come up with an answer for this question then there is no reason to merge. Remember that some studies show that 70-90% of mergers don’t end up working out, so only consider merging once you’ve thought about all the considerations.
How will you split your equity? If both companies are profitable and have passed the breakeven point in the J-curve of start-ups than both companies should have a frozen equity split. If either of the companies is still working towards the breakeven point than you need to consider a dynamic equity split. This is when equity changes based on the risks each partner makes and brings to the table. The best model for a dynamic equity split is Slicing Pie by Mike Moyer. If either business is pre-breakeven than reading this book is necessary for both partners. If both partners have a frozen equity spilt than, determine what each company is worth and divide based on the business net worth and percentage owned.
Will you be able to survive for the next year with lower profits? Mergers are not easy and they take a toll on the company in the beginning. You will lose sales as you merge the two companies together. Make sure that you have enough reserve to cover lower sales for at least the following year.
Who will have the final say? When things get tough, the buck needs to stop at someone. Power sharing never works well, so it’s important to understand who will get the final say. This can be determined by the equity split or by another method, but both partners need to understand who will have the final say and both partners need to be ok with the decision.
What will the brand of the new company be? Using an existing brand can be the easy route, but there could be resentment between parties. Creating a new brand is difficult because you have to start the marketing process over.
How will employees be integrated together? Will there be any job overlap? Any layoffs? Employees need to be told about a potential merger before hearing about it through the grape vine. Waiting will only cause heartache and imaginations of worst-case scenarios. This will also distract them from performing their jobs. The structure of the new organization needs to be thought through. Do you need to move to a different location? What systems need to be integrated? Point of sales, Human Resource, Payroll, Benefits.
What new training needs to be implemented? Mergers bring potential new job roles. How will those employees be adequately trained on what they need to do? How will you determine employee moral after the merger? How will you get feedback from employees on where the merger needs more attention?
Will your customers like any new added services? Mergers likely bring new products or services and it’s important to make sure your customers will stay loyal to your brand if you bring in those new services. A good way to test this is to talk to your current customers and ask if the new services will appeal to them.
How does the two customers bases fit together? There will likely be differences in the two customer bases and it’s important to understand what those differences are to make sure the new business can fully accept both sides of the customer base. You don’t want to alienate either side.
A common concern with business partners is the difference in long-term vision. One partner might want an exit while another partner wants to grow and scale the business. Alternatively, they may want to focus on other things. This is why it’s important to understand what your long-term goal with the business is.
In addition to that question, there are five situations where you should know what you are going to do. Make sure the answers are put in the operating agreement of the new business. What will happen if one of the partners dies? What will happen if one of the partners declares bankruptcy? What will happen if one of the partners becomes disabled and is no longer able to contribute time and talent to the business? What happens if a partner gets divorced? What happens if partners reach an irreconcilable difference on an important issue? These are the five major “Ds” in a partnership. Death, Debt, Disability, Divorce, Disagreement.
Never make the decision to merge an emotional decision. Remember that up to 90% of mergers fail so don’t feel like you need to act immediately. Take your time and do your research on whether it will be a good idea in the long run. If both partners have the same long-term goal for the business and both partners can be completely transparent and open about all of the above considerations than there might be a chance it will work.
Keep in mind that you don’t have to merge in order to grow two small businesses. You can have the advantages of a merger while keeping separate entities simply by working close with each other. Work on specific projects together and split profits on those activities. Co-locate and market together. There are many options for two small businesses to grow together and get the benefits of a merger while avoiding the pitfalls.