DEFINITION of 'Business Consolidation'

The consolidation of several business units or several different companies into a larger organization. Business consolidation is used to improve operational efficiency by reducing redundant personnel and processes. It is most often associated with mergers and acquisitions. Business consolidation can result in long-term cost savings, but in the short-term can be expensive and complex.

BREAKING DOWN 'Business Consolidation'

Businesses seeking to combine operations have several options at their disposal. The most drastic option is to combine multiple companies or business units into a brand new company. This can be an expensive proposition if one of the merging companies is liquidated, and can carry additional costs associated with creating a new brand. Another option for business consolidation involves moving smaller operations into an existing company that is not intended on being dismantled.

Consolidated business can obtain cheaper financing if the consolidated entity is more stable, more profitable, or has more assets to use as collateral. It may also be able to use its larger size to extract better terms from suppliers because it will be able to buy more units.

Companies that combine operations must also deal with cultural differences between firms. For example, merging an older, established technology company with a small start-up company may cause personnel to clash. In this example, management in the older firm may feel more comfortable with operating under strict administrative hierarchies, while the start-up company may have preferred less administrative authority over operations.

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