Mergers and acquisitions might sound like a predatory process social businesses wouldn’t undertake, but there are situations when it’s worthy of considering as a growth strategy.
For example, another business in your marketplace may become available for purchase from retiring owners.
What is a merger in business?
When one of the organisations involved acquires the assets, liabilities and obligations of the other(s), the merger is known as a friendly takeover. Another merger option is establishing a new organisation that acquires the assets, liabilities and obligations of the existing ones.
You may require technical assistance to manage shareholding structures, strike agreements for the new shareholdings, or co-ordinate the different regulators organisations have, e.g. the Regulator of Community Interest Companies and the Financial Conduct Authority.
Such an acquisition might provide an opportunity for accelerated growth, simultaneously obtaining human resources with skill and experience, facilities and market share.
Take care that the values and social mission of your social business are reflected in the legal structure of the organisation which emerges from the process.
Social enterprise merger cost and risk
Judge the opportunity to acquire another enterprise against cost and risk. Consider whether there is management capacity and working capital available to carry out the process of business integration. If you’re transferring staff along with the business, there will be obligations that come with them.
There may also be a culture shock issue to deal with if the way your social business functions, its core values and engagement with workers are different to the previous employer and the expectation of the workers.
Customers might not automatically transfer their affections to the consolidated enterprise. Consider the process and cost of merging brands as well as facilities and workforce. Your social business will need a fully costed integration plan including possibly redundancy costs.
Merger pitfalls
If both parties see the merger as a way to escape problems in their governance, management or business model, the result might be an organisation with multiple problems. It may also cause integration issues and shortage of working capital.
Social business acquisition strategy
The best methodology is to model the optimum version of a social business that could be obtained as a result of the merger. This will indicate the likely improvement in social output and profitability. These increases are the social and financial return on investment the Board of the social business will judge the purchase, integration costs and increased working capital against.
Compare this return on investment to the capital required of your social business. If the return projections are high enough, it makes the case for raising the investment requirement from the sources of finance used by your social enterprise.
Are mergers good for social enterprises?
Mergers are a mechanism that can be used for growth. Enterprises providing similar services in the same market place, or in neighbouring localities, would be able to provide a better service more economically if they integrated, affording the same delivery capacity with a lower overhead.
The improved business model will also make it easier to increase service level. Meanwhile, improved profitability makes it easier to create internal capital and raise external investment to finance further growth.
Compare the merger option to the consortia option, especially if you’ve identified the potential for great levels of culture shock as a high risk factor. This may be the case with a merger between an established social business and a private business, or an enterprise spin out from a charity or statutory authority. The consortia working option will make it easier for the social business to retain its social mission and preferred system of governance.
Before going ahead with a social business acquisition, ensure that the new business model is more likely to be socially productive and profitable than the two businesses working independently.