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What types of mergers might small businesses undergo?

| Jun 26, 2018 | Mergers & Acquisitions |

Some people in Colorado may be under the impression that only large, nationally known conglomerates execute business mergers, as these major mergers often make news headlines. However, even small businesses can benefit from a merger. The following is a brief explanation of the types of mergers a small business can undertake and what the benefits of these mergers are.

Horizontal mergers take place between two businesses that provide similar products or services to similar customers. In a horizontal merger, the newly formed business is generally able to offer the product or service at a lower cost to a greater number of customers. Market shares also generally go up. Costs to run the new business also generally go down in a horizontal merger because any redundancies the original two businesses had are eliminated.

Vertical mergers, on the other hand, take place between two businesses that offer the similar goods or services but are not operating at the same stage of the production process. One benefit of a vertical merger is that the running of the business is not disrupted, and the customer base remains steady. Like horizontal mergers, costs to run the new business in a vertical merger generally go down through the elimination of redundancies.

Finally, there are concentric mergers. Concentric mergers take place between two businesses that have a similar customer base but produce different products or services. This type of merger provides diversity to the new business’s offerings. The new business gains the advantages offered by each former business, and turns more into a business that provides all the goods or services a customer is looking for in one place, which often leads to an increase in new business.

Mergers are complex business transactions. Negotiations must take place, and each party to the merger must understand how the merger will affect them financially. Federal and state regulations need to be followed. For example, per the Clayton Act, a merger cannot create a monopoly. The failure to follow these regulations could hold up the merger or prevent it altogether. Therefore, small businesses looking to execute a merger should make sure they understand what is required of them per the law.