There are four core merger and acquisition strategies that you can use to expand your business. Each has its advantages depending on what the buyer is looking to achieve, e.g. dominance of an existing market, entrance into a new market, or teaming up with the competition.
This guide details each business buyer strategy, looks at which is best used when, and how a broker fits into the equation.
Horizontal Merger
A horizontal merger is a merger between two companies with similar products and similar audiences. The idea is that by coming together, the two companies can increase their reach. As such, these mergers are made between competitors.
An example of a horizontal merger would be if Apple and Microsoft merged. They each make personal computers and other tech, but the merged business would benefit from Microsoft’s dominance of the office environment, which combined with Apple’s big slice of the smartphone market would create a very large company indeed.
Alternatively, consider how large businesses expand by absorbing start-ups in their industry, or how some start-ups get bigger by buying up their competitors.
When Is a Horizontal Merger Useful?
A horizontal merger earns a business a bigger slice of the pie in the industry it’s in. It does so by earning business from brand-loyal customers of the acquired business, by incorporating or discontinuing the acquired business’ products, and by pooling together the two business’ marketing and advertising budgets to increase reach. Horizontal mergers are useful both for small and large businesses.
Vertical Merger
A vertical merger is where a business merges with another business higher up in the supply chain. These companies aren’t necessarily competitors; in fact, they may have an existing supplier relationship.
An example of a vertical merger is easy to think of. A smartphone manufacturer might buy a business that makes chips, screens or other components. A car manufacturer might buy the business that supplies them with car parts.
When Is a Vertical Merger Useful?
The point of vertical mergers is to control the supply chain. If a business can control its supply chain, it can cut its costs dramatically, and gain a significant advantage over the competition.
Take a car manufacturer for example. Its supplier provides it with parts at a price point above the cost of manufacture so that it can make a profit. Should the car manufacturer buy out its supplier, it can then supply itself with parts at cost, representing a significant saving. It can also take cost-cutting measures to further increase revenue such as sourcing raw materials at a lower price.
Concentric Merger
A concentric merger is a slightly different version of the horizontal merger. A concentric merger is where both businesses sell to the same customers, but they sell different products. As such, they are only indirect competitors, but are again looking to increase their reach and the size of the market they sell to.
Again, there are plenty of examples of concentric mergers from tech. If a software manufacturer merged with a hardware manufacturer, they could push into the home computer market.
When Is a Concentric Merger Useful?
A concentric merger increases a business’ reach in its core audience. The alternative is to design a product, arrange for its manufacture, market it and so on; while still complex, a concentric merger is a quicker and easier way to do the same thing.
Conglomerate Merger
Last but not least, a conglomerate merger is where two businesses with nothing in common merge. Examples of conglomerate mergers include Coca-Cola, Disney and other multinationals: they expand into new and profitable markets that may have nothing to do with their initial markets.
None of these expansion strategies is inherently better than the others. Which one you employ depends on how big your business is, what you’re looking to achieve, and what’s possible in the current economic climate.
When Is a Conglomerate Merger Useful?
Conglomerate mergers are most useful for larger businesses that can afford to take on risk. They can use their reputation and brand to ensure that they are successful in a new industry; name recognition goes a long way. Unless your business has already expanded vertically, there is less risk and perhaps just as much reward to be found through other strategies.
Broker vs. No Broker
No matter how you’re looking to expand, the most important question is whether you use a business broker or not.
If you own and operate your own business, it may be tempting to try to expand on your own, too. This comes naturally to business owners: it’s part of the job to be self-reliant. It may be what helped you grow your business from nothing to what it is today.
That being said, there are many things that even seasoned business buyers can get wrong. Due diligence pertains not just to the profitability of the business and its future expansion, but to regulations, which can be stringent in particular industries. There is no recompense should you fail to conduct thorough enough due diligence, meaning that a new buyer, or a buyer approaching an unscrupulous seller, stands to lose a large amount of money should something go wrong.
Buy a Business with Chelsea Corporate
Buying a business through a dedicated mergers and acquisitions specialist like Chelsea Corporate will save you time, money and stress.
We specialise in off-market sales, which is where a business is bought and sold without it ever officially being listed for sale. We find, vet and approach businesses with owners that may be looking to sell. Rather than bring them to market like other brokers do, we connect them with buyers through our exclusive private database; in other words, the businesses we offer to buyers aren’t available anywhere else, online or off.
If you want to know more about off-market and how it might benefit you, either as a business owner or as an overseas buyer, contact us today. Our expert team are available over the phone at +44 (0) 20 3011 1373. If you prefer, reach out through our contact form or email us at info@chelseacorporate.com.