There are times when a merger seems like the ideal thing to do: you’ve launched a company, you’ve hit great heights, but you’re a crossroads where you’re not sure how exactly to expand–you’ve never been this big before, and you just don’t have the expertise and infrastructure to expand bigger than where you are. Or you have grown with a great product that is a game changer for the industry but are struggling by very slim margins, and you need outside help to take it to the next level.

Of course, there are times when a merger is not right for you. There is the infamous case, now half a century ago, when the juggernaut railroad companies, New York Central and Pennsylvania Railroads merged to form the sixth largest company in the world (think of the Apple or Walmart of its day). And in two years they were bankrupt. There were a lot of reasons why the merger failed–market forces weren’t in favor of railroads anymore; rising costs and increasing regulation. And, of course, the inability to merge company cultures, which is every M&A’s nightmare: who should stay? Who should go? What departments are essential and what are redundant, and if one is redundant, how do you decide which is going to stay?

So how do you know when is the best time for a merger or acquisition?


When Do You Sell Your Business?

Maybe you want to stay with your baby from start to finish, and no one can fault you for that–starting a company is hard and building it up to the point where VC and other companies have their eyes on you is no small feat. It’s hard to let go, even when selling seems like the best course of action. On the other hand, maybe your goal all along has been to build up a valuable business that will allow you to sell for a great profit and move on to other projects (or maybe early retirement!)

A good first step when considering when to sell is to think about how companies are valued. In the lifetime of a business, different criteria will be used to judge the market-worthiness of the business. At first, it may be an issue of revenue multiples. Later in the company’s life, it may come down to revenue and EBITDA. And for an established company, EBITDA, P/E and FCF multiples are the first places an acquirer will look at.

And, of course, different industries are measured by different metrics. Software companies usually are measured by revenue multiples. Tech hardware and semiconductors will be measured by EBITDA multiples, as will IT companies.  

So you need to look at your industry, your company’s lifecycle, and take a good long look at those metrics yourself. Are you really appealing? Will you sell for a good price that will make it all worth it? Or will your competitor be better launching a competing product and circumventing you altogether?  


When it’s Time to Admit a Merger is Your Best Option?

This can be a hard decision, but there can be real reasons to dive into the merger. Imagine that you’ve started a company that has great promise, great response, but no buyers? You’re getting industry accolades for being innovative and fresh, but you’re just not closing deals, and without those sales deals, you’re not going to convince any investors to get on board.  

It might be time to consider a strategic partnership (an M&A). You may need to start by casting a wide net, maybe not going public–for lots of reasons, but you may not want to advertise to competitors that you’re going up for sale; also, you may not want to alarm your own employees who could get scared and jump ship.  

Tips for looking for a buyer:

  • Talk to every possible partner–you’re never sure where the buyer will come from.
  • Make a process. Track every conversation, set deadlines, and establish your terms.
  • Go all in. No half-measures. If you’re looking into it, commit to it.


When it’s Time to Admit a Merger is Not Your Best Option

There are plenty of reasons to not merge. We all get butterflies in our stomach sometimes, but often they really mean something, and it’s important to listen. Then back up your intuition with research.

  • Are the cultures of the two companies substantially different, even though they’re both good? They may both be profitable companies with happy workforces who like coming in to work every day, where everyone has healthy relationships, but a major culture shift of merging two diametrically-opposed workplace philosophies is a recipe for disaster. Often, the instinct is to pick the dominant culture–the culture of the biggest company, or the culture that is most manufactured–but that can cause great friction for a workbase that is being thrust into something entirely new, rather than melded, maintaining bits of themselves.
  • There’s also the nagging feeling from a growing company that is flush with cash who thinks “we have the money–we should grow”. Your company may be completely unready for this growth, and the “growth for the sake of growth” mindset has crippled a lot of profitable companies. M&As should be strategic and well-planned, taking the best parts of both companies and creating something altogether new that is stronger as one piece.
  • If there’s a serious issue within your own company that you haven’t been able to get past, one that leadership may have been putting off dealing with, entering a partnership will only exacerbate that problem, not fix it. Transferring one leadership problem to another, bigger leadership team will only sow dissension and hard feelings.


When You Are Ready for an M&A

When you are ready, when you’re sure you’re ready and you’re making the decision for all the right reasons, then CapLinked comes into the picture. Our Virtual Data Rooms allow both parties to see the others’ data and make evaluations of all the financial and personnel records that will be part of the decision-making process. You’ll be ready for an M&A knowing that you’ve made an educated choice.

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