When talking about consolidation as far as the business world goes, the term means that several businesses or business units are being combined into a single organization. Generally, we see the consolidation of this nature as a result of the need to streamline operations for one; it also could be for economic reasons. Because consolidation could lead to a reduction in certain operational costs, depending on the situation, consolidating might make the most sense for certain companies. That said, to initiate a large-scale consolidation, in the short term the various entities involved could be looking at a pretty substantial cost. In this article, we look at the concept of consolidation as well as the benefits and drawbacks of consolidating.
Business Consolidation: The Basics
Consolidation represents at least two companies coming together and forming a larger entity. The phrase mergers and acquisitions often apply when discussing consolidation. Usually, whenever there is business consolidation, the companies that combined to form a single larger company no longer exist individually. All that remains is now the larger entity that was formed via the consolidating process.
There are a few different types of consolidation, the most common one being when, as noted, multiple companies are brought together to form one larger organization. In this particular instance, the process can be somewhat expensive. After all, you are dealing with the potential for having to liquidate one or more of the smaller companies, and also of course there is the rebranding factor. As the company being formed is a brand new company, it goes without saying that most often this new company will need to create a new brand and brand identity.
Another option as far as consolidation is concerned involves coalescing smaller operations into a company that is not being taken apart. The reasons for consolidating in this way include a need to improve overall operations within those smaller units, being able to more easily expand into new markets, the ability to innovate more effectively and thus create new products, and the cost savings that come from sharing various aspects of the business.
Regardless of how the consolidating effort is undertaken, it is a rather big step for the companies/units involved and the decision should be weighed carefully. One thing that has to be done before any consolidation is consulting with shareholders. They, after all, have an investment in the company and/or companies and consequently will likely have a say as to how consolidating efforts unfold—if they do at all. Additionally, companies need to consider how and when they will launch their new brand. What will marketing efforts look like? How much will it cost to rebrand overall? And yet another factor to think about is what assets might need to be sold off and how subsequently this might happen. Again, this is a process that needs to be looked at from every conceivable angle before pulling the trigger on undergoing a large scale consolidation.
The Different Types of Consolidation
There is more than just one form of business consolidation. It will depend on the objectives, strategy, and largely the types of companies that will be involved in the consolidating process. Below are a few of the key types of consolidation.
This is often the more common form of consolidating companies. In this type of consolidation, companies are brought together to create a new larger company—the smaller companies therefore no longer exist independently of this larger entity.
With this type of consolidating effort, a larger company is acquiring a smaller one and to this end, the smaller firm is liquidated. The smaller organization is dismantled while the larger company maintains its operations.
In this form of consolidation, a large business will buy the majority of shares of a smaller, target company. They will then have the controlling interest of that company. To get the controlling interest they will have had to acquire more than fifty percent of the stock.
Variable Interest Entity
There are times when a controlling interest is not based upon stock voting rights—this is referred to as a variable interest entity. Such are established separately as what are called ‘special purpose vehicles.’
Some Advantages and Disadvantages to Consolidating
As far as the advantages associated with business consolidation, there are quite a few to consider. First off, often companies will consolidate because of a negative or weak financial position. When combined with other firms, the financial picture could very well stabilize. This also makes it easier for the newly formed firm to find financing if required.
Not to mention, as the company that has been formed is now larger and likely has access to more resources, they have greater negotiating power when it comes to dealing with suppliers and vendors. This can lead to more favorable overall terms. And as consolidation usually involves competitors merging, the new company will probably have a larger market share and thus an expanded customer base.
As far as the downsides when it comes to business consolidation, there could be conflicting company cultures. One firm may not be used to operating as another firm, and this could conceivably lead to tensions in both the short and long term. It is not uncommon for personnel clashes to occur which could easily disrupt workflow and operations across the board. This is why before consolidation, the companies involved need to come together on things such as vision, mission, and best practices moving forward. Also, as mentioned, consolidation could be costly to the businesses involved. Paying attention to all relevant expenses is especially important to determine if consolidating is worth it.
First Union Lending works with small business owners to get them the financing they need when they need it—not weeks or months from now. Our loan programs are fast and flexible and designed to suit your company’s specific needs. No off the shelf approach with us. We offer short term loans, merchant cash advances, and bridge loans, among other financing solutions. Call today!