Merger

In plain English

In an acquisition, one business buys another and the sellers leave with cash, shares or a mix of the two. In a merger, two businesses combine and both sets of owners keep an interest in what they have created together. The shares of each business are typically exchanged for shares in a new or enlarged holding company, in proportions that reflect what each side brings in revenue, profit, people and prospects.

The word is used loosely. Many deals announced as mergers are acquisitions in legal form, with one party clearly in control afterwards. What matters to founders is the substance: who owns what, who runs the combined business, and how each side's value has been measured.

Why it matters to founders

A merger can be the right route for agency founders who want scale, a broader offer or a stronger position with buyers, without selling now. Two complementary agencies combining can reach a size and breadth that each would take years to build alone, and the combined group may be worth more to a future acquirer than the two parts. The trade-off is that founders exchange full control of a business they know for a share of a larger one they will run with partners, so the relative valuation, the governance and the plan for the combined business deserve as much attention as any sale would.

What to watch for

• Relative valuation sets the share split. Each business is assessed on the same basis, usually normalised EBITDA, revenue quality and growth, and the result is negotiated as carefully as a price.
• Leadership, board composition and decision rights need to be agreed before completion, with drag-along and tag-along rights covering what happens when the combined group is sold.
• Both sides carry out due diligence on each other, since each is effectively buying into the other.
• Integration is where the value is won or lost: clients, teams, systems and brands have to be brought together with a plan, and the synergies that justified the deal have to be delivered.
• Tax treatment of a share exchange varies by jurisdiction and structure, and should be checked before terms are agreed.

Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.