Synergy exists when the combined performance of two or more companies is greater than the sum of the individual companies. Synergy is often the driving motivation for mergers and acquisitions.

Synergy can be developed in one or more of the following ways:

  • Often the combined company can reduce its fixed costs by eliminating duplicate costs, operations, and departments. Operating costs as a percentage of gross income can usually be reduced, improving the bottom line.
  • Often special knowledge and experience of the owners and/or senior managers can be put to greater and more profitable use with a larger business and more employees. This is a form of leverage.
  • When a company is larger, its cash flow tends to be more stable because the number of transactions taking place during each accounting period usually increases.
  • Additional locations help the company improve its service to existing clients / customers and attract new ones. Your company also becomes more visible which helps to attract new business. More locations result in geographical diversification which is also beneficial.
  • More efficient use of combined office or retail space can usually be accomplished adding to the bottom line.
  • A larger company usually makes it easier to recruit and retain valuable employees. Employees generally feel more secure with a larger company and one that is growing. Increased market share gives you an advantage over your competitors.
  • More efficient and effective utilization of employees is usually possible. This results in lower operating expenses. A larger firm makes it easier to maximize the use of employee skills.
  • Your personal lifestyle is likely to improve with a larger business operation. A strong second in command, makes it easier and more practical to take days off or plan vacations. You can be more confident that being away from the business will not have negative consequences. Your family life is likely to improve.
  • Obtaining financing from banks or credit from suppliers and others is likely to be easier and the terms offered are likely to improve. This will improve your bottom line and make it easier to grow your business.
  • Access to a new customer / client base is likely to improve your profits.
  • Cross selling opportunities may be created when the combined firms have been selling complementary products or services.
  • Purchasing economies may result due to the increased size and frequency of purchases. It is easier to negotiate better prices when you purchase in larger quantities.
  • If a significant competitor is being absorbed, it may make it easier to increase the price of the product or service being offered.
  • If the two or more firms merged together offer different products and/or services, the diversification will create a more stable operation.
  • A business that merges with a supplier, no longer has to pay the supplier since they become one entity. Thus, any profit is kept inhouse.
  • A merger or acquisition may be the first step towards positioning a small but successful company so that it can sell franchises through a newly formed franchise company.
  • A merger may be exactly what is needed to implement an estate plan and/or retirement plan.

Synergy can be operational or financial. Operational synergy is the result of revenue enhancement and cost savings while financial synergy is the result of a decrease in the cost of capital and tax benefits. Synergy value should not be confused with control premium which should be calculated separately. Sometimes the whole is more valuable than the sum of its parts.
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