The purpose of company involvement with mergers and acquisitions is to generate excess revenue. Rather than engaging in one or the other, when operating together, companies aim to achieve more significant revenue than would be possible if the mergers or acquisitions were utilized alone. The target company and those acquired benefit from this revenue synergy by accumulating more revenue.
The additional revenue generated is referred to as “revenue synergy.” The target and acquiring companies benefit from revenue synergy because they obtain an upper hand in negotiations. The target may attempt to make more from the acquiring, given that funds are expected to contribute to their revenue. The acquiring company, however, may ask the target to negotiate any proposed premium rates based on the understanding that the sales increase the target company will obtain will significantly offset a reduced acquisition price.
The goal may be to make more money out of a simple process, but the reality of revenue synergy is that it is involved. Without an understanding of the uncertainties involved, revenue synergy is unlikely to work out in any company’s favor. To learn more about revenue synergies in the context of mergers and acquisitions, continue reading below.
Understanding M&A Revenue Synergies
Assumptions must be made skillfully to see merit in potential revenue synergies. A clear understanding of factors influencing the revenue synergy that can be achieved is, first and foremost, essential to the success of the combined business. These factors include market expansion, knowing how to integrate and introduce products, and establishing strategies for the combined company. When businesses are merged, new strategies must be developed while working together.
Follow Effective Practices For Best Outcomes
While there are many obstacles to generating revenue synergies, it is possible to attain revenue synergy via mergers and acquisitions. For the best outcomes, follow through on the necessary practices for increasing your business’s likelihood of generating revenue synergy via mergers and acquisitions. Some of these practices are described as follows:
- Actively track metrics associated with a merger and acquisition: You have the potential to review and investigate M&A critical operations to determine how these changes influence important revenue metrics.
- Clearly define roles from the start of the merger or the acquisition so that everyone understands their position within the process
- Have a clear and organized market strategy so that the combined business can succeed following the M&A
- Drive revenue synergy home by creating financial incentives for workers: Sustained worker motivation will lead to a greater likelihood of revenue synergy.
Calculating Revenue Synergy
To determine the effectiveness of revenue synergies after M&A, you’ll want to calculate revenue synergy by adding the business’s total revenue prior to the M&A and then comparing this total to the revenue obtained following it. The difference equates to the revenue synergy.
Grow Your Business Revenue For The Future
To acquire greater profitability, businesses are interested in maximizing revenue synergy for the best business outcomes. If your business could use a profitability boost, consider M&A pursuits for future revenue synergies.