Financial synergy is a term that gets bandied around in the media, but what does it really mean? Financial synergies are benefits gained through combining two companies or business transactions. It’s not a one-size-fits-all situation; there are many ways to achieve synergies, and those strategies can manifest themselves in different ways. The devil is in the details. To get the most out of your financial synergy strategy, you need to be deliberate about how you execute it. For example, if you own both an ice cream parlor and a dairy farm, there may be opportunities for greater efficiency from purchasing raw materials at wholesale prices rather than retail prices. Or if you own both an auto body shop and an auto dealership, there may be opportunities for cost savings from having the two businesses share facilities like office space or a warehouse instead of leasing them separately. These are examples of financial synergies—when businesses combine efforts to get more bang for their buck than they could on their own.
Why are financial synergies so important?
Financial synergies are a key part of any merger and acquisition (M&A) strategy. They’re cash that gets pulled out of a company—it’s literally cash in the bank. It’s also a way to grow your business at a faster rate than you could organically by acquiring other companies or bringing in new revenue streams. While those new revenue streams are great, they don’t always generate cash the way a synergy does. Financial synergies can help make up for lost earnings. For example, maybe you’re reducing expenses by combining two offices into one space instead of leasing them both separately. If you’re also saving on rent, that can help offset the lost revenue that comes with hiring fewer employees.
What does a successful financial synergy look like?
A successful financial synergy can look like a lot of things. It can be an acquisition with a great strategic fit that doubles your customer base. It can be a merger between two companies that leads to lower costs or increased revenue through economies of scale. It can be a partnership between two companies that generates new revenue streams. It can also be a joint venture with two companies providing each other with expertise and resources. The possibilities for financial synergies are endless, which is why it’s so important to be deliberate about what you want to achieve. A successful financial synergy may also require you to change your business model. For example, you might be able to achieve synergies by expanding into a completely new market that’s unrelated to your core business. Doing so can allow you to access new customers and new revenue, which can help offset any lost revenue that comes with your financial synergy strategy.
Find the operational efficiencies first before you consolidate.
Operational efficiencies are those instances where one company can do something more efficiently than another company. For example, if your ice cream business is using a different type of refrigeration than the dairy farm, you can work with the dairy farm to expand its refrigeration and cooling systems to accommodate your needs. In exchange, the dairy farm can use your refrigeration to cool its raw product. If you can find operational efficiencies, you can implement them before you even merge or acquire another company. This is critical because it gives you something to show for your synergy strategy before you even pull the trigger on a merger or acquisition. It also helps build trust between you and your partners, which can make it easier to negotiate an agreement.
Diversification may have the greatest financial benefit
Diversification is when two business partners offer products and services that are unrelated. For example, your ice cream parlor and dairy farm may both produce consumer goods, but you can also partner with a financial services company that provides credit for purchasing consumer goods. By diversifying your financial synergies, you can generate cash regardless of what one industry is experiencing. For example, if demand for ice cream drops off and your business is negatively impacted, your financial synergy with the dairy farm will help offset the loss.
Debt has the greatest potential for risk and loss
Debt is when one company provides another with financing by lending them money. This can be done in the form of a loan, an equity investment, or a combination of both. The potential risk with using debt to finance your synergy is that the other company may not be able to pay you back. And if the other company does go bankrupt, you may lose your investment because it’s considered a liability. Debt may be a good tool if you’re trying to acquire another company that’s beyond your acquisition budget. The key here is to make sure the company you’re loaning money to has a strong enough credit rating to pay you back. If you’re not sure, you may want to consider another financial synergy strategy instead.
Acquisitions are a form of a strategic or financial synergy. Acquisition strategies are typically aimed at purchasing a company that provides products or services that are directly related to the acquirer’s core business. This is the most traditional form of synergy, and it’s a way to quickly expand your business through acquisitions. Acquisitions are more than just combining two companies. It also involves taking on the acquired company’s debt and liabilities. This can be a risky move, so make sure you consider all of the potential risk before pulling the trigger on this strategy.
Synergies are important because they can help make up for lost earnings. For example, if your ice cream business is slowing down and dairy farms aren’t producing enough milk, you can partner with those farms to increase production and help them sell more milk. In exchange, the dairy farms can help you sell more ice cream. Making sure your synergy strategy is deliberate is the best way to make sure you achieve the desired results. This means you should first identify what you want to achieve before you start looking for potential partners.