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How can companies consolidate or cooperate to pursue business opportunities?
Mergers and acquisitions are hotly debated opportunities for some businesses. But other options may be more beneficial than a costly merger or acquisition, depending on the circumstances. The following list includes types of business consolidation and cooperation:
Mergers — In a merger, both businesses wind down as separate entities. Usually, a new company is formed and the assets and liabilities of the original businesses are transferred to the new company. Mergers can be costly both financially and in impact on productivity. Companies involved in mergers will want to complete negotiations, prepare for divestitures (if necessary) and complete due diligence.
Acquisitions — Acquisitions are also known as "takeovers" or "buyouts" and involve one business buying the possessions of another business. Acquisitions can also be expensive to complete. Most acquisitions involve the following steps: negotiations, due diligence, purchase and sale, and portfolio transfers.
Sellers are usually required to provide complete information on the financial aspects of the business. Sellers' duties typically include providing a valuation report, facilities information, suppliers, personnel, business opportunities descriptions, marketing practices, insurance and legal status.
Buyers must complete due diligence, including review of corporate records and financial data, employment, real property, personal property, existing contracts, suppliers and compliance with the law.
As for the sale and purchase, sellers may finance part of the sale. Sales may involve transfer of stock or cash and stock as payment. Similar to a closing on real property, an attorney will be on hand to close a deal and transfer assets.
Joint ventures — A joint venture does not involve parties buying interests in another business. Rather, two or more businesses agree to pursue a project together and share in the profits or losses. Both parties place a financial stake in the project.
The advantages of this arrangement include leveraging the strengths of the businesses and dividing the risk between them. Joint ventures can create market opportunities for companies that otherwise would not have the money or the time to develop a competitive product or service.
Strategic alliances — Strategic alliances are forged between two or more companies that combine to leverage their strength, for example, by each providing certain parts for a product or by buying supplies in bulk for a better price. Strategic alliances are more loosely organized than joint ventures and may not involve a financial stake. Rather, a strategic alliance attempts to accomplish certain shared goals.
Partnerships — Partnerships involve agreement between at least two people or business entities to be co-owners of a business and share in profits and losses. Unlike joint ventures, partnerships usually involve more than one project and last until one of the partners leaves the partnership. Partnerships are a common business entity used in professions such as law, medicine and other enterprises and are a simple way for entrepreneurs to join forces.
Preparing for a business consolidation or cooperation can be daunting because of the research and negotiations involved. Company leaders may wish to obtain legal and tax advice and guidance for complex transactions or drafting agreements. As with all business decisions, proper planning is necessary to complete a merger, acquisition or cooperative agreement.
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