Whether you are a business owner looking to exit or an owner looking to grow your business, the right merger and acquisition (M&A) strategy can help you achieve your goals. However, there are many different M&A deal structures to choose from. Knowing your options can help you choose the strategy that best fits your personal situation and meets your objectives.

In this article, we discuss:

• M&A strategies explained
• Types of M&A strategies
• Tips for building a strong M&A strategy

Related Article: Seven Types of Business Acquisition Loans

M&A Strategies Explained

When you think of exiting or acquiring a business, you might think of selling or buying a business outright to an individual. While these are great options, they are by no means the only ones available to you. 

For some business owners, there are times when it might make more sense to merge your business with another instead of selling it outright. Mergers and acquisitions refers to the process of combining two or more companies into one. As the name suggests, one company could acquire the other in an acquisition, or the two companies could be merged to form a new entity. 

As a business owner, M&A deals represent an opportunity for you to either exit the business or grow your business further. For example, if you wish to exit, you could sell your business to a different company in an acquisition. Or, you could pursue a merger deal that provides a payoff and allows you to step away from owning and operating the company. 

On the other hand, if you are looking to expand your business, buying or merging with another company can provide you with exciting new options. Regardless of what your goals are (exit or growth), understanding M&A deals can help you navigate the business world. 

“As a business owner, M&A deals represent an opportunity for you to either exit the business or grow your business further.”

There are many different types of M&A strategies and structures. Your goals will determine which strategy is right for your situation. In the next section, we cover the main types of M&A strategies. 

Types of M&A Strategies

The five main M&A strategies include:

• Product-extension
• Market-extension
• Vertical
• Horizontal
• Conglomerate

We will look at each of these below. If your goal is to grow your business, try to understand how each strategy could help you achieve your goals. If you are looking to make an exit, knowing each strategy could help you understand the types of businesses that could benefit from acquiring or merging with your company. 

Product-extension M&A strategy

Let’s say you own an ecommerce company that sells cell phone cases. Business is good, but you are looking to grow your sales and revenue. You notice that Bluetooth headsets, which are often paired with smartphones, are selling well. Instead of developing Bluetooth headsets from the ground up, you could acquire or merge with a company that already does so, saving you a ton of work.

This would be an example of a product-extension M&A strategy. A product-extension M&A strategy is when a company acquires or merges with another company in the same market in order to gain new products that complement its existing products. 

In this scenario, both companies occupy the Smartphone Accessory market but offer very different products. By merging with or acquiring the other company, you gain instant access to their products and customers, expanding the business. 

In addition to providing an expanded product lineup and customer base, the economy of scale created by the merger or acquisition also allows for lower operating costs. However, this can sometimes come at the expense of less efficiency for production and marketing. 

“A product-extension M&A strategy is when a company acquires or merges with another company in the same market in order to gain new products that complement its existing products.”

Market-extension M&A strategy

Now, let’s say you run the same ecommerce business selling smartphone cases exclusively in the US. Another option to expand your business without adding new product lines is to merge with or acquire a business that operates in an entirely different market. 

For example, you could purchase a smartphone ecommerce business that sells exclusively in Europe, a huge market. By doing so, you would instantly expand your customer base and avoid the long slog of establishing your business on a new continent. 

As you can infer from the example above, a market-extension M&A strategy is when two companies sell similar products but to two or more different markets. The advantages of a market-extension strategy are an expanded market reach, a larger customer base, and potential economies of scale. 

However, as the business grows, it can get more complex and difficult to manage. 

Vertical M&A strategy

Now, let’s assume the same company selling phone cases buys the cases from a manufacturer overseas, ships them to the US using a shipping company, and uses a 3PL provider to store and ship the cases to customers. In this scenario, the company primarily markets and sells the cases and coordinates the rest through other parties. 

If this company grew to be large enough, it might make sense to bring other pieces of the puzzle in-house. For example, they may want to start designing and manufacturing their own cases, bringing down production costs. Or, it may pay to build or buy their own US-based warehouse in order to bring down storage costs. 

Furthermore, instead of creating a new manufacturing operation or warehouse, they may simply buy or merge with companies already doing these tasks. This would be an example of a vertical M&A strategy. 

With a vertical strategy, businesses that handle different stages of a supply chain merge to create a company that handles both (or all) tasks. This can lead to increased efficiency, lower operating costs, and higher profit. Also, handling everything in-house can make it easier to implement appropriate quality-control measures. 

On the other hand, vertical integration can lead to increased bureaucratic costs as the scope of work expands. 

“With a vertical strategy, businesses that handle different stages of a supply chain merge to create a company that handles both (or all) tasks.”

Horizontal M&A strategy

With a horizontal M&A strategy, two or more companies that produce similar products combine in order to reduce competition and pool resources. In the example we have been using, this would include the phone-case ecommerce company merging with or acquiring another company that sells phone cases to the same market base (i.e., the US). 

Similar to a market extension strategy, a horizontal M&A strategy can expand a company’s customer base. It can also reduce competition, as mentioned. However, it can lead to less personal control over decisions, less business flexibility, and a larger organization to manage. 

Conglomerate M&A strategy

With a conglomerate M&A strategy, a business acquires another company that provides different business services. After the acquisition, the two companies could operate completely separately or have some degree of overlap. 

Continuing the example above, a conglomerate M&A strategy could see the phone-case ecommerce company acquire a pet food company. After the acquisition, the two companies will likely function completely separately from each other. 

There are some situations where a conglomerate merger or acquisition could allow for product or market extension to take place. Either way, this strategy provides more revenue and greater diversification. This does sometimes come at the cost of less efficiency, however.

“Getting clear on your goals will help you understand which strategy is right for your situation.”

Tips for Building a Strong M&A Strategy

Whether you are exiting or expanding your business, choosing the right M&A strategy is crucial. Below, we cover several things to keep in mind when building your strategy. 

Establish your goals

First, get clear on your goals. If you are seeking an exit, do you want a clean break from your business, or do you want to retain some ownership? Are you open to staying involved in operations or not? How much would you ideally like to receive for your business? Do you have any goals as far as what kind of organization or individual takes over your company?

If you are looking to expand your business, do you want to acquire a company outright, or are you open to a merger? Would your company benefit from access to additional markets, additional products, or vertical integration? Do you want to retain control of the new organization, or are you open to taking on other roles?

Getting clear on your goals will help you understand which strategy is right for your situation. 

Get clear on target company characteristics

Once you have established your goals, get clear on the characteristics of the types of companies that might be good merger or acquisition candidates. For example, let’s say you want to gain access to European markets as a US-based company selling cell phone cases. In this scenario, you may want to look for similar European companies of a certain size and reach. 

Getting clear on the target company’s characteristics will help you narrow down your search. 

Establish your deal-breakers

Next, list out any deal-breakers you might have. For example, if you want to see your company thrive after the acquisition, you may not want to sell it to a business you know will shut it down after they buy it. 

“From preparing your business for a merger or acquisition to negotiating and closing the deal, the right team can help you create a truly successful transaction.”

Prepare your business for a merger or acquisition

Next, ensure your business is ready for a merger or acquisition. This includes ensuring all documentation is in good shape, your finances are in order, and more. 

Secure financing

If you plan to acquire a business, make sure you have a clear plan for financing the deal. With sufficient cash saved up, this may be easy. However, if you plan to take on debt to finance the deal, understand what your options are. 

Avoid emotional decisions

Do your best to avoid emotional decisions. Gather and analyze relevant information and make educated decisions. Emotional decision-making can sometimes lead to disastrous business decisions. At the same time, if your gut is telling you that something is wrong, you might want to listen to it. 

Assemble your team

M&A deals can be complex to navigate. If you don’t have extensive M&A experience, you will likely want to consider bringing on individuals who can help you throughout the process. This could include an attorney, an accountant, and a business Advisor (or business broker). 

From preparing your business for a merger or acquisition to negotiating and closing the deal, the right team can help you create a truly successful transaction.