As a business owner, you may be brainstorming several methods of expansion. A common approach is merging your business with another to expand market share and increase profits. Nevertheless, there are different types of mergers that entail different legal considerations. This article will guide you through your options for undertaking a business merger.
What is a Business Merger?
During a merger, your business joins another business. As a result, you can continue to expand your business offerings via a new entity or one of the existing business entities.
A merger differs from an acquisition. An acquisition is where your business takes over another business, essentially subsuming the acquired business into your existing business. Given the vendors in an acquisition typically cease their involvement in the business going forward, the negotiations can look quite different to a merger scenario where both owners are looking to navigate an ongoing working relationship post-merger.
There are also various types of mergers, including:
- a conglomerate merger, which combines two businesses from different industries;
- horizontal merger, which combines two companies from the same industry;
- a vertical merger, which combines two companies that are on different levels of the same supply chain;
- a market extension merger, where two companies from the same industry but different markets merge; and
- a product extension merger, where two businesses combine to sell similar products.
How Can I Conduct a Business Merger?
The first step is determining the value of each business, which will help dictate the split of ownership going forward. You may want to consider conducting a formal business valuation on both companies. Seeking an independent valuation for both businesses is often recommended, particularly given the need to ensure ongoing good relationships between the two business owners going forwards.
Once you have determined the value of the two businesses, you will need to consider the structure of the new business going forward. For example, will you set up a new company to operate the business? If so, the valuation of the business before the merger will determine the percentage of shares held by each existing owner and the expected contributions going forward.
Alternatively, you can use one of the existing business structures to operate the new merged business going forward. The two businesses will then need to negotiate and enter into an agreement reflecting the critical terms of the merger. This will include but is not limited to, setting out matters such as:
- agreed structure of the new business;
- defined assets (tangible, intangible and stock) and liabilities subject to the merger;
- how the business will be operated going forwards (noting that you may also need to put in place a new shareholders agreement in respect of the company operating the merged business for this purpose); and
- warranties and indemnities given by both parties.
What Are the Commerce Commission Requirements During a Business Merger?
The Commerce Commission regulates competition law in New Zealand. In the context of a business merger, you need to ensure that the merger will not substantially lessen competition in the market. If there is likely to be a substantial lessening of competition in the market, you should seek clearance to conduct the merger.
You can apply for a merger clearance by filling out an online application and paying the fee. After that, the Commerce Commission will assess your application and request information from:
- competitors;
- suppliers; and
- customers.
The Commerce Commission will then make its decision public and provide written reasons for the decision on the Commission’s case registrar.
How Can I Ensure a Successful Business Merger?
Before executing the merger, you should conduct due diligence on the target business to ensure it fits your existing business correctly. Moreover, you can:
- compare organisational structures;
- determine leadership roles for the new company;
- compare company cultures;
- determine branding strategies;
- analyse the financial positions of both companies; and
- understand operating costs.
Moreover, you can forecast whether the business merger will generate increased profits. You should compare this figure with projected costs to ensure a good investment.
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Key Takeaways
When conducting a business merger, there are some factors to consider. Firstly, it is best to understand the different ways to structure your merger. You can begin your merger by valuing your company and then preparing a merger agreement. It can also help to conduct due diligence on the business you are merging with. Lastly, you should consider whether you must apply for a clearance from the Commerce Commission.
If you need help conducting a business merger, contact our experienced business lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
A business merger occurs when two businesses choose to combine.
It is voluntary to get clearance. However, gaining clearance can avoid the situation where the Commission reverses the merger where it lessens competition in the market.
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