It starts off as a brilliant idea. The small business owner is interested in buying another company or they want to sell theirs. Dollar signs and possibilities float around in their head. After a lot of hard work, the transaction is done and everyone celebrates. But then, it ends up hurting the future of the combined companies more than grow them. In fact, 70% to 90% of all mergers fail.
What goes wrong? Here is how to get the odds in your favor:
1. Product offering synergy. Determine if the two products or services really fit together. Will they compete or cannibalize customers when the companies are merged or are they complementary? Many times, the offers have less synergy than the two companies initially think. How to test before the sale: Approach five current customers to see if they will buy the other product or service. Then, find out why or why not.
2. Management match. Can the combined teams work together? Which executives will lead which functions? Many times there is overlap and certain managers and departments need to be eliminated. Remember, there should be clear leaders in the new company and not management by committee. How to test before the sale: Have both management teams participate in making a few important decisions for the proposed new company. Hire a consultant to observe how well this works and report back.
3. Culture blend. Can the cultures of the company work not only together, but will they blend over time? Often, one culture dominates the other and valuable employees can’t thrive in the new environment and leave. How to test before the sale: Set up three teams of employees from the two different cultures and have them accomplish a task. It should be planning an event for the company or a new recognition program. Evaluate the results.
4. Setting expectations. These are usually set too high for a short period of time. Many mergers actually push the company back in terms of profitability before it propels them forward. Assume no gains from synergies for at least the first six months. How to test before the sale: Review the growth and profitability of the two companies before the sale and cut their future growth by 50% for the next six months to get a closer estimate of what will happened post-merger.
5. Market assumptions. How will the other companies and customers in the market actually react to the merger? Many times the expected changes never come. How to test before the sale: There is no way to test his since it is impossible to simulate what the market will do realistically. However, similar past transactions in the same or parallel industries may provide a clue.
How successful was the merger of your company?