If you’re planning to sell your business or join forces with another company in your industry, then you are in the throes of preparing for a merger or acquisition. While mergers and acquisitions are some of the most common business transactions, they can often lead to some confusion, particularly for those navigating them for the first time. If you’re about to embark on your first merger or acquisition, here are three key points you’ll want to keep in mind.
- Mergers and Acquisitions Aren’t Interchangeable Terms
Oftentimes, people misuse the terms “merger” and “acquisition” synonymously. However, this does not accurately capture the meanings of both words. An acquisition refers to the process of one company taking over another company by purchasing it. Mergers, on the other hand, are slightly more complex. A merger refers to the process of two firms (usually similar in size) coming together as a new, joint entity. Under a merger, the CEOs of both individual companies agree that joining their organizations together is in both of their best interests.
- You’ll Need a Valuation Analysis
To proceed with either a merger or an acquisition, you will need a comprehensive valuation analysis of your company. A business valuation is the process of establishing the economic value of a company. A proper valuation is a key ingredient in mergers and acquisitions for all parties.
Consider an acquisition as an example. For the seller, a business valuation ensures that they receive the proper compensation in line with the actual value of their company. For the buyer, it provides the reassurance that the company they are purchasing has the adequate resources to collect salient data related to the organization’s performance. This also boosts the company’s credibility, which can facilitate a sale.
When the time comes to complete your business valuation, it’s advisable to recruit specialized business valuation advisors. Oftentimes, when a business owner tries to value their company independently, they are inevitably biased. When you’ve invested so much of your time, money, and energy into your company, it’s difficult not to be. However, it’s important not to shape the value of your business based on factors that are not relevant to that figure. Having an impartial, experienced professional in your corner to complete the business valuation process will be invaluable.
- Mergers and Acquisitions Are Negotiable
Like any other business dealing, mergers and acquisitions are both negotiable. This is another reason why it’s so important to know the value of your company – it gives you negotiating power. However, it’s important to remember that valuation isn’t the only component that affects negotiation procedures. Some others include:
- Market comparables
- Trends in your company’s historical financial activity
- The industry your company operates in
- The level of experience and expertise of your management team
- Whether there are multiple bidders on your company or only a single interested party
To help with the negotiation process, it’s a good idea to hire legal counsel, particularly if you run a small business. With a legal professional on your side, you’ll have added expertise and peace of mind that negotiations will be handled effectively.
Navigating your first merger or acquisition can feel daunting. However, by informing yourself of the key details to remember, you’re doing everything in your power to facilitate and optimize the process. While every merger and acquisition is a bit different, these three principles apply to every single one, so be sure to keep them at the forefront of your mind every step of the way.
