The pros and cons are always fact specific and depend on your specific situation. I assume you have already looked at this from a business standpoint and see reasons to do the deal and these are your pros. Having said that, here is a list of ten things to consider (based on Illinois law, though most will likely apply in CA):
1. Anytime you bring in fellow owners, there is a fiduciary duty of loyalty and fair dealing to the other owners. You can't set up a competing business. You generally can't just give yourself all the income.
2. Will this result in increased income or headaches?
3. Do you need to merge in order to properly grow the company or is internal growth possible/desirable?
4. What form of entity will the final entity be? e.g. corporation (S or C) or limited liability company? Tax, flexibility of ownership and future sale implications.
5. Will you have an ownership agreement that states what happens in the event of a dispute, how income and losses are apportioned, who has what rights of management control, what decisions require majority vote and which ones require a higher vote, cumulative voting of stock etc. What happens if a co-owner dies - now you are in business with the spouse you hate unless you address this in the agreement etc.
6. Are you ready to share the decision making power and be accountable to others?
7. Why do they want to merge? Why do you want to merge?
8. Is a merger the right way to go or do you want to set up a new entity owned by the 2 existing entities?
9. What will this do to existing business/customers? Will it help? Hurt?
10. Will these lead to new competition and how will I address that?
11. How can I best leverage the strengths of both companies?
12. What weaknesses does the new company have that need to be overcome?
13. Any culture issues? Am I inheriting problem employees or lawsuits? Make sure you do full due diligence as though you were buying the company.
One last war story: a client merged for $2.4MM and was to get stock 1.5 years later. The venture went under and client got $0. Moral: be careful who you go into business with.
A merger usually brings with it some challenges. So if you decide to jump in, remember that there will be some challenges, likely some personality conflicts and maybe some attrition. But a well-done merger can also take your business to places you could never have gotten alone.
I usually encourage a client to consider a merger or acquisition in two steps. The first step is deciding whether it makes business sense to merge. Once you've made that determination, the next step is to decide the big deal points and go-forward business terms. In most cases, the first step is usually best left without the lawyers -- or perhaps with some high level consultation. The second step is good to involve both your lawyer and your accountant to help discuss questions -- but don't get bogged on details too early. Consensus on big items; leave details for later.
So, the first point of analysis -- Should you do it?
The first question is do you really need to merge to accomplish your goal here? In some cases, perhaps you aren't looking for a merger, but you are looking for a partnership of some sort. Maybe it makes sense to enter into some type of agreement -- a partnership agreement, distribution agreement, or even to form a separate joint venture and keep your existing businesses. In each of these alternative structures, you retain your current business and gain something from the partner, from a preferred pricing scheme, steady supply, talent, etc. The downside is you lose control and the synergies that come from a combined business are lost. The key question to ask yourself -- can I reach my ultimate goal without combining the company? If your answer is no, then you should really consider trying to make the merger work.
If you've decided that a merger or acquisition makes sense and you can't accomplish the goal without combining the company, then you should decide if this party is the right merger partner. In your case, with a small business and limited people, the real key is making it a good cultural fit. Do you believe you will work well together? Perhaps you can try it out first by working on a discrete project with the businesses. Perhaps you can co-consult on a customer. See if you work well together because you are forming a partnership and no matter how much the structure might work, without a personal fit, it ain't worth the extra headaches.
Second point of analysis -- How to do it?
This question is very fact-specific. But what I can tell you is that if you are very committed to doing the merger after point one -- your lawyers and accountants usually can help you create a structure that will work and address some of the key challenges -- including integration issues, taxes, asset contributions, employment issues, intellectual property, decision-making, etc.
To accomplish this stage, I think the best approach is asking each of the parties to draft a set of deal points independent of one another. Then, come together and discuss those deal points to see where you stand. Again, these shouldn't be nitty gritty points like the structure of the transaction, but should more consider broader goals, operational styles, employment strategies, decision-making authority, etc. Hammering out those points will help you to find out what is truly important and how the business can be run.
And finally, prepare a basic term sheet laying out those points. Who is contributing what, who will be responsible for what decisions, what will the business look like after it is combined, etc.? Ultimately, your lawyers and accountants can help with some of the details like deal structure, tax consequences, intellectual property, etc.
For a CEO, your job is deciding whether you really need to merge and then getting consensus on the big issues of how to do it. Once the parties are all behind the deal, documenting the deal and handling deal points is where a good lawyer and accountant can earn their keep.