69 A Girven Road Bayfair
Box 10329 Mount Maunganui 3152

Considering Merging

For a small business owner committed to energising and growing the business, s/he should understand the benefits of joining forces with another business in the same field or sector. A merger, where two businesses come together to establish a more sustainable or robust business usually gives the market more confidence in its long term viability.

Unfortunately very few small businesses understand the benefits of merging with another and rarely consider it. Perhaps they view the merger option as only a big company option? Take a look the number of Bay of Plenty based plumbers, electricians and arborists advertising in the yellow pages.

There are 127 plumbers, 155 electricians and 30 arborists. Many of whom we suspect are struggling to make ends meet on a consistent basis.

Why is it that so many small business continue to struggle on the same way as they started, when merging could provide a real alternative.

Bruce believes you have to think about how small traders have got to where they are. In most situations an excellent tradesperson has been successful from their own efforts. Gaining profession recognition, qualifications and experience working for a larger organisation. They are encouraged by their employer to be successful and excel in what they are doing. Then there are few slightly different scenarios which happen.

  1. They get made redundant.
  2. They cannot get along with co workers, and or corporate scene.
  3. After a while the boss stops encouraging them and focuses attention on another star wonder.
  4. They have been encouraged by friends and existing clients that they could be successful themselves.
  5. They want a better lifestyle and less work pressure.

For what ever reason they find themselves thrust into in to the self employer arena. They have put together enough money for a van, had it sign written and given out a few business cards to everyone they know. To start off with jobs just come and everything appears rosy. The problem is after a while all your friends do not need your trade and you have to obtain work from outside persons.

After about a time, it becomes apparent there were advantages with your old firm. If you were a "sparky" a co worker would always be available to pull wires, likewise a builder would have some labour to hold the other end of the plank.

Now you are self employed you have to work out how to overcome these issues. Sometimes your partner or child could assist, but this requires both to earn a living from the same activity. Many businesses start up by relying on the spouse's regular income to pay for the groceries and outgoings. It is not always an option to have your spouse assist except after hours.

Some may employ casual unskilled labour when necessary and get frustrated with the lack of understanding, motivation and/or cost of this person.

Most likely is a small business operator finding another operator in the industry who is subcontracted for the job. In a subcontracting situation control remains with the business that has the job and the relationship last only as long as necessary to complete the task. Often the subcontracting is mutual and returned on another job. Self employed people tend to rely on these temporary subcontractors and you could well ask why they do not form some lasting business partnership.

Bruce says that subcontractors are often viewed as the competitor. Forming business relationships take time to build up confidence. Largely it is a "trust situation"
So how can a small business commence the merger option?

The key is to examine your business vision and ambition, and to get a good business advisor/project manager to support the process and who will chart a pathway. But in the first instance, the small business owner should develop a short list of target companies who have similar aspirations and where management chemistry could work. There needs to be an identification of the benefits of the merger. These might include:

  • Grow at a faster rate
  • Gain market share
  • Expand geographically
  • Realise economies of scale
  • Cost reduction and/or productivity
  • Gain new knowledge
  • Access to new customer markets
  • Asset reduction, releasing cash for growth
  • Staff retention due to greater career opportunities and more challenging work

We believe that one of the major benefits of smaller companies merging is that it gives customers greater confidence that the combined business will better cope with a harsher economic environment.

The companies need not be in the same geographic region, but come together in order to have cross selling opportunities.
It may be that the merger strategy is a long term prospect, say in two or three years away, but the actions towards this goal can start now.

The advisor should also have in their team legal and valuation expertise. There also needs to be an assessment of management capability to ensure that the new business structure supports the bigger company.

What we have found to be the best small business merger is horizontal, meaning a Builder, Stopper, Plumber, Electrician would combine together to give a complete package service to the customer. Each person has their own area of expertise but each can help the other, share resources such as employees, premises. Individuals are not in direct competition but create work for each other.

Today we have virtual office advantages. We are not restricted to one work premises. The internet and technology means we are able to have office assistance all over the country. Successful business operators who understand the benefits of merging will gain competitive advantage and improve on the old way of doing business.

Putting two business together is no simple task and the grief of separation does mean careful planning and issues need to be addressed at an early stage. We would recommend those who are considering the advantages of combining complete a written business plan. To discuss, improve and agree to the future success.