What is a Virtual Merger?
Updated: May 8, 2021
A small stand-alone company faces the challenge of having proportionally
very few buyers to acquire it. If it does happen to find a suitor, the likelihood
is that the purchase price multiple (companies are usually priced at a
multiple of profits or earnings) that a buyer is willing to pay for the company
will be proportionately small as well.
A virtual merger is created when several independent companies enter into a
contractual arrangement which is functionally, but not legally, equivalent to
a merger. In doing so, each of the companies contractually agrees to become
part of a larger notional group of companies in order to take advantage of
opportunities that are not otherwise available to them as small individual
entities. Despite this agreement, the underlying ownership of each company
does not change.
A virtual merger does not, unlike a traditional merger, integrate any of
the ‘merging’ companies into a group. Instead, each of the companies
remain independent of each other. So, from an ownership and operational
perspective, nothing changes.
Grouping several companies together in this manner is an efficient way of
quickly achieving scale. Having that increased scale will make the virtual
group much more attractive to a larger pool of potential buyers – who
will pay a premium for that scale. Therefore, on exit, the owners of each
company in the virtual group can expect to receive a higher price that might
otherwise only be achieved by means of exceptional organic growth. Thus,
the net result of the virtual merger is an exit price that is maximized for
the entrepreneur and done in a fraction of the time of growing a business
ADVANTAGES OF A VIRTUAL MERGER
A virtual merger has several advantages over standalone independent
Attractive to a much larger buyer pool.
Buyers will pay a premium for a group of themed companies.
Faster way to increase purchase price as opposed to waiting for organic growth.
Ability to cross-sell within the themed group.
Shared synergies and economies of scale.
Increased earnings and profits.
Easier to raise meaningful amounts of capital for a group of themed companies.
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