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What is a horizontal merger?

A horizontal merger occurs when two or more companies at the same level of the supply chain join together to form a new organization. In this process, also known as horizontal acquisition or horizontal integration, companies are usually part of the same industry.  

How do horizontal acquisitions work?

A horizontal merger is a way of growing a business by acquiring a competitor or a company that creates similar products to expand its market share and leveraging the benefits of scale.   Buying other businesses in your industry has two main advantages: 1) minimizing your competition and 2) increasing your own customer base. A horizontal acquisition saves a business owner the work of convincing consumers of a competitor to switch over to your brand. A horizontal takeover does not have to involve a competitor. A business can also use a horizontal acquisition to enter a new market. For example, a luxury handbag company that uses animal products can buy a vegan luxury handbag company to appeal to a new customer base.  This allows the buying company to use its transferable skills of making handbags to a new consumer base.  

Examples of horizontal mergers

Facebook and Instagram

In 2012, Mark Zuckerberg acquired the social media company, Instagram, for a record-setting $1 billion. With the Facebook and Instagram merger, the company secured its ...

An escrow holdback in M&A is one of the methods a buyer can use to protect himself after a business transaction. When making an acquisition, whether it’s an asset or stock sale, or a merger, you always have the risk of encountering surprises after the deal is done. You can still do your commercial due diligence and put all the representations and warranties in your purchase agreement, but what remedies do you have in place when things go wrong? The best option is not a lawsuit or eating the cost, but to rely on a holdback. In M&A, a holdback is a risk allocation procedure that allows the buyer to retain a specific amount of the purchase price after closing the sale. According to the holdback clause, specified in the purchase agreement, both parties agree that the buyer will preserve this amount for a certain period or until a defined condition is satisfied. 

What is an escrow holdback agreement in M&A?

An escrow holdback is when an agreed amount from the business purchase is retained by a third-party agent, which could be a law firm. This is an acceptable practice in a business transaction, as long as the money is set aside for the buyer to recover. It is by an escrow agreement that the buyer can have a self-warranty and insurance after the sale is closed. The reason buyers use an escrow holdback is ...

Contracts are meant to protect you, and for a purchase agreement, there are requirements to help you achieve protection in your business transaction. Reps and warranties in M&A are an example of great tools that will reduce considerably the possibility of entering a bad deal. Although representations and warranties are essential, your contract should also include other clauses that give both parties assurance that the sale is going to be transparent and mutually beneficial.  These are the five clauses that every purchase agreement should include so parties can be legally protected.

Reps and Warranties in M&A

Representations 

Reps, or representations, are the statements that each party agrees to in the M&A transaction. They are promises of the current situation regarding the business sale.  Representations in contracts are very important because they help create a remedy in case the other side was not honest about something. If you are buying a business, you want assurances in writing from the seller about certain aspects of how the business is running. While the buyer should do their own due diligence, there is extra pressure if you have in writing that the seller actually told the buyer certain information. ...

  People who buy into franchises often buy more than one so they can have more businesses and make more money. Franchise buyers are often entrepreneurially-minded and want to grow their book of business (meaning their book of franchises). The nice thing about franchising is that all the rules, systems, and recipes (if food related) are handed down to the franchisee. All the franchisee has to do is follow those. Once the franchisee has one in place and that franchise is successful, it's relatively easy to replicate this once the franchisee has the hang of running the business.

Can you own more than one franchise?

Generally, there are no laws that prohibit owning more than one franchise. However, it depends on the franchise agreement. Franchise agreements frequently have restrictions on what other type of business a franchisee can own. Sometimes those restrictions are way too broad or overly restrictive, which could mean that you would be violating the franchise agreement. You would want to negotiate those terms to be in line with your future goals. Other possible terms in the franchise agreement that could affect your ability to open more than one franchise are geographic restrictions. Sometimes franchisors prohibit the franchisee from doing business in certain territories, so you want to make sure those terms are in line with your future goals. Need help with a franchise review? Call today at (630) 517-5529 or fill out our inquiry form so we can contact you. ...

What is commercial due diligence?

Commercial due diligence is the process of inspecting the business you are buying. It's similar to buying a house —you do an inspection before purchasing the house. The objective of due diligence is to have a full understanding of the target company’s liabilities and strengths, in order to be aware of the potential risks and calculate the Return on Investment of the business purchase. It is important not to view due diligence as a mere formality. Conducting due diligence is the step in the buying process that is going to help you determine whether it’s a good investment to continue with the business acquisition.

Why is conducting M&A due diligence important?

Avoid risks when buying a business

When you conduct commercial due diligence, you reduce the risks of making a mistake when making an acquisition. You make an in-depth investigation to ensure the company you are purchasing is worth its price and that it is free of debts or other liabilities.

Keep the court in your favor

If you make an acquisition and the seller gives fake information about the business you’re buying, in order to enforce your rights, you have to go to court. Unfortunately, a court will not take your claims seriously if you did not conduct commercial due diligence before making the purchase. It is very likely the judge will not act in your favor because it is the buyer’s responsibility to do due diligence in any Mergers and Acquisitions transaction. ...