Neil Patel

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M&A for small and medium businesses (SME) can effectively level the playing field and promote rapid growth. Although M&As are typically associated with multinational corporations and large companies, SMEs are also quickly recognizing the potential advantages.

Regardless of their size, mergers have a high failure percentage that can range from 70% to 90%. Several complexities are involved in bringing the deal to a successful conclusion and post-merger integration. M&As are not exactly cheap and ineffective synergies can result in lost ROI.

This is why, you should do the necessary due diligence to identify the risks and rewards of the deal. Before moving forward, acquirers should conduct a meticulous investigation into the pros and cons to determine if the transaction will provide adequate value.

Work out how to maximize the benefits from the rewards and how to minimize the risks. You’ll also align further strategies with the objectives you hope to gain from the M&A deal. Like, for instance, capturing new markets, expanding your clientele, gaining talent, or acquiring IP.

Let’s Look at Some Numbers

Research indicates that although M&A activity has been slowing down at the highest corporate levels, deals in the SME sector continue. M&As typically occur between sellers or founders and buyers or competitors. Private equity firms or individual investors may also be interested in buying SMEs.

Experts estimate that the number of M&A deals in 2023 will be around 15,893 valued at $1.3T. The deal volume has dropped 26% as compared to 2022, and several factors have contributed to this decline. These may include rising interest rates that have made financing challenging.

Determining the risks and rewards of M&A for small and medium businesses (SME) can speed up the due diligence process. That’s how you can streamline mergers. Let’s start by exploring the potential rewards.

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The Ultimate Guide To Pitch Decks

Expanding to New Markets and Customer Base

Customer acquisition can be challenging for new brands trying to gain a market presence. Attracting a clientele typically requires investing significant time and resources. Collaborating with an existing brand provides access to an established customer base that is already familiar with the products.

Surviving companies can cater to their combined set of customers which is cost-effective and quick. This strategic acquisition can be especially beneficial for companies looking to gain a foothold in new geographical markets or verticals.

Mergers between competitors is the ideal strategy to remove market saturation and fragmentation regardless of the vertical. Overcapacity can occur when multiple small and medium businesses operate within the same limited geographical area.

Expanding into new locations with brick-and-mortar units or eCommerce reach is also effective for scaling the merged company quickly.

Diversifying the Product Portfolio

Offering consumers a broader product portfolio has a higher probability of making sales. This is one of the primary reasons why founders enter into M&A for small and medium businesses (SME). A partnership results in instant diversification with complementary products and services.

In this way, companies can tap into new revenue streams. For instance, a breakfast cereal company merging with a startup selling dairy products. Or, a stationery brand partnering with school backpack manufacturers.

Strategies like these can help with brand differentiation with opportunities for cross-selling and upselling. Gaining that elusive edge over the competition is easily done. Promoting sales and retaining customers are only some of the many positives.

Acqui-hires to Acquire Skill Sets and Talent

Small business founders typically ideate industry-disruptive concepts that can transform how the sector operates. Startups attract upcoming talent and innovative methods of working and developing products and providing services also.

Acquiring a small company with diverse skill sets can help expand and enhance the workforce. By gaining new expertise, the surviving company has a better chance of remaining competitive and relevant in a rapidly altering ecosystem.

This is why, it is not unusual for bigger companies to acquire smaller ventures for the sole objective of acquihires. Once the integration is complete, the company benefits from the workforce’s expertise, knowledge, and valuable experience.

A good example is a digital marketing agency merging with another company specializing in SEO or Search Engine Optimization. Talent is the driving force behind a venture’s success and M&A advisors are well aware of their value.

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Cost-Cutting and Economies of Scale

Mergers and acquisitions in SMEs have the potential to achieve significant cost savings. Combining operations can lead to sourcing cheaper inventory from vendors and suppliers because of bulk orders. The surviving company can avail of favorable payment terms and attractive pricing structures.

Lower administrative expenses, shared overhead expenses, eliminated redundancies, and pooled marketing and advertising costs influence the bottom line substantially. The streamlined workflows and synergies arising from leveraging the strengths and resources of the merging companies result in higher profitability.

The resultant economies of scale can create a more effective and efficient business model that has exceptional potential. Long-term sustainability and scalability attract and retain a wider talent pool.

Acquiring Intellectual Property (IP) and Intangible Assets

In today’s knowledge-driven business landscape, companies must rely on Intellectual Property to stay relevant in their verticals. IP forms the basis for developing new products and services that ensure you stay ahead of the competition.

IP is now a crucial asset not just for tech start-ups, multinationals, and corporate giants but also for other spheres. Proprietary assets, patents, trademarks, copyrights, and technologies are essential to drive innovation and long-term growth. And M&A for small and medium businesses (SME) can get you there.

Aside from developing new products, technology has become indispensable for running the company efficiently and providing top-notch customer service. Since the economic landscape is now largely IT-driven, companies must adopt the latest software tools and applications.

Whether it is advertising strategies, payment portals, eCommerce, taxation, securing customer PII, HR management, or any other, companies require tech capabilities.

Improved Valuation

Post-mergers, dealmakers work on improving the company’s operations and performance. Typically, they have pre-determined strategies on how to make that happen, including the synergies they hope to achieve. They are also ready with plans to restructure the management, board, and workforce.

Having achieved integration and captured a wider market and diverse customer base, the surviving firm has an edge over competitors. Once revenues, cash flows, and profitability improve, its value is likely to appreciate quickly.

Restructuring also leads to eliminating redundancies, economies of scale, cost efficiency, and better compliance with environmental and social regulations. All of these factors improve the brand name in the market and elicit better trust from customers.

Combining operations leads to better customer satisfaction, efficient delivery, and after-sales service. As the brand value improves, so does the company’s bottom line and valuation from investors’ perspectives. Fundraising is likely to be a lot more effective.

Demonstrating a robust competitive advantage, grabbing a substantial market share, and building strategies for sustained growth raise the company’s valuation.

Post-merger, you should know how to value your company. It can be an effective strategy to assess whether the transaction has been successful and will provide long-term value. Check out this video where I explain how it’s done.

Eliminating Barriers to Growth

M&As for small and medium businesses (SME) can successfully help them overcome the typical barriers to growth they experience. Several factors can act as hurdles, such as snagging large and prestigious contracts.

Certain categories of businesses prefer to offer contracts only to established and well-known brands. Regardless of whether they have the IP and tech capabilities to deliver and are highly profitable, their size gets in the way of getting projects.

Retail customers may also prefer to purchase products with bigger brand names instead of relatively unknown, upcoming startups. Small businesses also deal with operational hurdles that may get in the way of rapid growth.

These may include cash flows, hidden expenses that eat away at the profit margins, and inefficient customer service. Lack of adequate resources to devote to research and development to develop new product lines also hampers growth. Not to mention, the lack of aggressive marketing and advertising.

Horizontal mergers and partnering with other companies in the same vertical can help eliminate these challenges and promote growth.

Effective Exit Strategies

Mergers and acquisitions are the ideal strategy for startup founders and investors looking to exit the project. Innovators and industry disruptors wanting to venture into new business opportunities can simply sell their companies. They can then use the proceeds as funding to start a new venture.

Not only can the founder ensure that their company will sustain and continue to scale. But they’ll also hand it over to experienced stakeholders who can build on what they’ve started and take it forward. A powerful exit strategy allows for skill sets to thrive and product development to continue.

M&A for Small and Medium Businesses (SME) Risks

Due diligence is a critical exercise for mergers and acquisitions of any scale. Dealmakers must retain the services of expert M&A advisors, legal teams, IP specialists, and other professionals.

They’ll entrust the task of examining meticulously every aspect of the targeted company to identify risks. Some of the key pitfalls include:

Unknown Liabilities

Before entering into the merger or acquisition, the buyer must compile all the financial information about the target company. This information includes any liabilities the company owes and the dues it can collect from creditors.

It also outlines the company’s assets, financial statements, and unsecured and secured loans. To acquire this information, dealmakers can file a financial statement (UCC- 1) Article 9 or conduct a UCC search.

Invalid Business Licenses

Most companies must apply to acquire business licenses relevant to the sector where they intend to market products and services. State, federal, and/or local government agencies provide these permits and licenses. Buyers must confirm that the target has acquired these mandatory licenses.

They may also want to apply for and get the permits that the sellers have not acquired. Checking validity dates for renewals or amendment filings is also necessary to ensure that business continues without interruptions.

Companies entering into mergers should also focus on compliance with ESG principles, laws, and regulations.

Non-Compliance with Anti-Money Laundering Laws

Compliance with the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury is another issue that buyers need to be wary of. This agency administers and enforces economic and trade sanctions against specific countries.

These countries or individuals could be engaging in activities that potentially threaten the US. Any assets these “Specially Designated Nationals” or “SDNs” own are blocked by the agency. Further, American companies are prohibited from doing business with them.

Before entering into deals, acquirers should ensure that the target is complying with these rules. They should also examine the target’s operational structure to make sure it hasn’t broken any anti-money laundering laws.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.


Unclear Intellectual Property Rights

Acquirers purchasing a company for its Intellectual Property and intangible assets should carefully examine their ownership rights. Any encumbrances can result in the buyer being unable to exact value from the assets. Worse, they could get involved in expensive and time-consuming litigation.

Infringing on patents, copyrights, trademarks, and trade secrets can be a huge problem and lead to disputes. Marketing products developed using the IP can also run into hassles. Buyers should take the time to assess the quality and validity of the assets and the possibility of partial sales to third parties.

Not Having a Certificate of Good Standing

Making sure that the target has a Certificate of Good Standing is also a part of the due diligence. This document, issued by the state government verifies that the company is a legal entity and compliant with state regulations. It also confirms that the company duly files annual reports and pays taxes.

Evaluating the Risks and Rewards of M&A for SMEs is Important

Mergers and acquisitions in every business landscape regardless of its scale are not without pitfalls. However, M&A transactions in the small and medium-sized enterprise level have unique concerns and potential benefits.

Dealmakers may want to assess the value they can get from the deal before finalizing the purchase. Due diligence can help them uncover unexpected and hidden issues because of which walking away could be the better option.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.

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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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