Finance and business strategy professional Dwight Lester provides insight on mergers and acquisitions, directed toward companies that are considering an M&A-based expansion and for those that are being courted for a merger or acquisition.
How is the price for an acquisition calculated?
Price is calculated partly through research and accounting work, and partly through negotiation. While the value of a company’s shares and assets can be determined by accountants, intangible assets are harder to assess. If the purpose of the acquisition is primarily to secure certain tangible assets and expand market share, then the price may be simpler to determine. However, if the purpose is to build upon the goodwill enjoyed by the target company in a given sector, the price may be somewhat more fluid.
Where do purchasers find financing for the transaction?
Traditional business loans may not be available for a merger or acquisition. If your company does not have the resources to pay cash for the transaction, a number of options are available. Some companies attempt to offer shares as part of the payment, but sellers are often reluctant to accept an all-stock offer. Sometimes, sellers lend the funds to the buyer for a specific term and fixed interest rate, often with balloon payments included. Other alternatives include mezzanine financing, or so-called earn-outs, where the buyer pays the seller over time based on performance.
Can acquisitions serve as an exit strategy?
Sometimes, though preparation is required. Following an acquisition, the buyer will usually want the seller’s senior management to stay, in order to assist with training and integration. This transition period may range from a few months to a year, and may transform into a permanent position. Business owners that want to sell their firms and leave need to develop a strong management framework capable of supporting the transitional period without additional guidance.
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