Start-Up Vs Merger: What’s Best For New Businesses?

Mergers and acquisitions can present powerful methods of starting or improving a business. In particular, a merger, which combines two existing businesses into a single, new entity, can greatly enhance the target market, product offering, and talent pool while reducing costs and streamlining processes. It’s also generally easier to get finance for a merger than it is for a new venture. But, it can lead to a challenging clash of cultures and it requires that you have a business to merge, in the first place.

Mergers And Acquisitions

A merger is the voluntary fusion of two existing companies to create a single, new business entity (source: https://infinitymerge.com/). Mergers are considered viable methods of expanding existing business interests.

They differ from acquisitions, which is where one company buys another company. The bought company effectively ceases to exist after the deal is completed. A startup, on the other hand, is the formation of a completely new business. The acquiring company’s name and structure are typically retained, although there may naturally be some changes to incorporate some elements of the acquired business.

You Have Total Freedom With A Startup

With a startup, you can decide everything from the products you sell to the marketing techniques the business uses. In contrast, acquiring an existing business or merging with one, means some of that freedom will be removed from the process.

There is very little point merging if you’re just going to take the business in a completely different direction once the deal is complete.  Of course, there are some elements of any business that will be driven by market conditions, regulations, and other factors, but establishing a startup is the method that offers the greatest possible freedom.

Mergers Have High Capital Requirements

Mergers and acquisitions require more initial capital than starting your own business. There will be some costs for equipment and premises, licensing fees, and some other essentials, but it is possible to set up some new businesses on a shoestring budget.

Buying or merging with an existing company, on the other hand, means making a financially beneficial offer and then meeting the offer once it’s agreed, and this offer will take into account cash and holdings, assets, employees, deals, trading history, and a host of other factors that add to the expense.

You Need An Existing Business For A Merger

You can’t merge with another business if you don’t have a business in the first place. This will mean acquiring an existing business, and this means taking on everything from existing supplier contracts to any regulatory or licensing issues the business faces.

Acquisitions, and mergers, do require a lot of due diligence before the deal is completed.  Acquiring a business just so you can merge with another to create something more expansive is a very costly route.

A Merger Can Lead To Market Expansion

Mergers can be highly beneficial to existing business owners. One way that a merger can help an existing business is through market expansion. This expansion can come by opening a business up to a new geographical market or by expanding the product line.

Doubling the workforce or order book, or combining the existing deals of two companies means expanding the individual businesses so that they can potentially become something bigger than the two constituent parts.

License Acquisition Through Mergers

Licenses and regulations can be a complex area of any business entity. Take the finance industry as an example. It can be a long and drawn-out procedure to open a new bank in a new country, as it first requires the acquisition of an appropriate license. Rather than going through this long, drawn-out process, Santander has acquired banks in markets around the world. Part of the reason for these acquisitions has been to help acquire the needed licenses.

Another area where this might prove beneficial could be in the gambling industry. A retail bookmaker, for example, might merge with an existing online casino to gain access to its online license.

Existing Companies Means Existing Cash Flow

Merging with another company means potentially benefiting from the cash flow of both companies. Cash flow is the money that comes into and out of a business. Positive cash flow means the business is making money, which can potentially be used for further expansion or to pay out greater profits to directors.

Start-ups can struggle for early cash flow, relying on early deals as well as money invested by the founder or any VC funding. But, VC funding itself can be difficult to get without being able to show some positive cash flow. It’s a vicious and difficult circle, but it is one that a lot of start-ups find themselves in.

Existing Companies Also Means Existing Assets

Similarly, start-ups will not usually have many assets. Assets include buildings and premises, stock, vehicles, and equipment. Intangible assets like intellectual property also hold value. Like cash holdings, assets can be used to help secure funding, from high-street banks as well as investors.

While start-ups can struggle to show assets, mergers can lead to an increase in assets, even if it does lead to a reduction of cash in the bank.

Processes And Relationships Don’t Need As Much Development With A Merger

With a start-up, everything takes time, from the processes that are used in the business to relationships with other stakeholders. This not only includes relationships with clients and customers, but even with suppliers. Strong supplier relationships can be very beneficial – they can come with favorable invoicing terms, access to new and innovative products, and better transport and shipping arrangements.

Startups don’t have any notable relationships with suppliers and, in some cases, this can even mean that suppliers want some form of security before they start to establish a supply chain.

Start-Ups Can Struggle Getting Financing

We’ve touched on this point a couple of times but start-ups can really struggle to access finance. Initially, most money used by the company will come from the founders themselves.

Some government grants and other initiatives may provide basic funding, and there are new business loans available from departments in governments around the world. Financing from banks, traditional lenders, and investors can be especially difficult for start-ups to come by.

Mergers Can Provide Access To Talent

This form of merger and acquisition is especially common in the gaming industry, as well as in other creative industries. One publisher or producer buys another not only to gain access to their intangible assets, such as their gaming library and IPs, but also to the talent that created them.

A business might not be able to convince a lead designer to leave their current company, because they don’t want to leave their body of work behind. But, if the companies merge, the lead designer can continue to work on existing projects and both companies benefit.  

Conclusion

Mergers and acquisitions can be used to expand into new markets or to otherwise enhance an existing business. However, it doesn’t offer the same freedom as setting up a new business from scratch, which offers total freedom despite having greater financial and investment restraints.

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