An acquisition deal is the purchase of shares or ownership equity in a company by another business. It can be done for many reasons, such as gaining market share, avoiding a competitive threat, or accelerating growth.
Before a business decides to make an acquisition, it must first evaluate the target company’s assets, finances, and potential synergies. The evaluation process is often referred to as due diligence. This involves examining a target’s financial statements, legal liabilities, and operating risks. It also focuses on how the acquisition would be structured and funded. The purchaser must also consider whether the transaction will be friendly or hostile. Friendly deals typically involve the board and management of the target company endorsing the proposal; hostile acquisitions are when the target company’s board opposes a proposed takeover.
Once the evaluation is complete, an agreement must be reached on the purchase price and terms of the acquisition. The purchaser’s valuation expert will determine the company’s fair market value using a variety of business valuation methods. A few common ones include earnings before interest, taxes, depreciation and amortization (EBITDA), revenue multiples, and real option analysis. Valuation experts may also employ the “narrative game,” which involves finding creative ways to compare a company with competitors to argue for a higher valuation.
A well-crafted due diligence report provides a strong basis for the purchase of a company. This includes ensuring the purchase price is within reasonable limits and that it makes sense from a strategic perspective. For example, an acquisition that gives a business a presence in an untapped territory will be worth more than a company that does the same work in an area where it already has a foothold.
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