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Vertical or horizontal merger? Conglomeration? Understanding M&A

Once you have built a profitable enterprise, you may start receiving offers for a merger or buyout. You're wise not to brush off them off. As your business grows and becomes more successful, the marketplace may become more competitive.

When you ignore serious offers for buyouts or mergers, you're making a decision. You're deciding to keep growing without the investment a partner company could bring. At the same time, you can't just grab the first offer you see. You need to determine if any offer for a merger or acquisition will promote your goals.

Here are the main types of mergers, based on the relationship between the companies, their purpose, and their economic function:

Horizontal merger: Another company in the same part of your industry, often a direct competitor, wants to buy you out or merge in order to consolidate. You could benefit by a possible influx of cash, less competition in the market, and economies of scale.

Vertical merger: Companies at different points in the supply chain for the same finished product or service may decide they could operate more efficiently as one. Besides the influx of cash, you could benefit if there is real potential for synergy between the two firms.

Market extension merger: A company that deals in a similar product or service as yours but in a different market may seek to merge with you in order to extend its customer base. In addition to the money, you could gain pre-prepared access to a new customer base and a suite of proven product offerings to extend your own.

Product extension merger: Another company in your market may want to merge because it sells products or services related to yours and may even share customers. The money may be helpful, and you could also increase your profits by selling the two companies' related products as a single offering.

Conglomeration: This is an offer from an organization involved in a completely unrelated business or from one that is looking for a way in to your area or industry. They may have spotted your expertise or potential for profitability, so they may want to keep you on board or buy you out completely.

Once you've identified an offer or two that appears to promote your business goals, your M&A attorney can go over the details, perform due diligence and help you manage the risk.

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