Successful companies should be prepared for other companies to approach them to seek a strategic merger or a complete acquisition. For younger enterprises, this may be unexpected and perhaps even a bit jarring. Even though the news is always full of stories about high value mergers and acquisitions, plenty of entrepreneurs do not fully grasp everything that such a deal entails. After all, although these kinds of deals are becoming increasingly common, they also tend to be rather complicated. And, for many people, going through a deal like this is something that they only experience once or twice during their careers, so there is understandable confusion surrounding the process. Here are the key things that everyone should know about mergers and acquisitions:
Reasons they Happen
There are large companies that scoop up other companies for all sorts of reasons. In some cases, they are seeking to add to their existing infrastructure and there is a company that is already fulfilling a certain niche. In other situations, a company is looking to eliminate the competition and so they absorb existing competitors into their business. And, sometimes a company is impressed with another company’s product or team, wants to be a part of it, and has the resources to really make it soar.
Granted, there are times when the company looking to buy does not have the best of intentions, but a company that is approached should not assume that there is some shady ulterior motive. There are often strategic advantages underlying a company’s decision to seek a merger or acquisition, and in many instances, both companies can benefit enormously from the deal. If your company feels uncertain about an interested party, the best course of action is to ask a lot of questions and conduct your own investigation to determine whether it is a company with which you would be interested in working.
Just because a company shows interest in merging with or acquiring your company does not mean that it will actually come to fruition. A lot of companies identify possible targets and begin the negotiation process, but then once they begin the compulsory due diligence investigation, they may learn things that make them walk away from the table. If your company is interested in seeing a deal like this through to the end, then you have to do your homework and ensure your affairs are in order before allowing the prospective purchaser to begin poking around.
For anyone not familiar with the purpose and scope of a due diligence investigation, you may want to check out an example of a due diligence checklist so you can determine whether you have copies of the requisite documents and records. Even if your team does not have experience with the whole ordeal, the main way to ensure that things go smoothly is to stay organized. Then, as the team leading the process provides guidance, you can easily furnish the items that they request.
Everyone gets caught up in valuation, even though a fraction of those individuals can probably explain what all goes into coming up with that abstruse number. There may not be one specific formula applicable in all situations, but there are some general themes that will guide how to arrive at the right value. In general, investors will examine a lot of different factors, some of which are concrete and based on cold hard facts and figures and other analyses that are more speculative in nature.
For example, valuation often takes into consideration the state of the pertinent industry, the strength and reputation of the company’s leadership team, the company’s traction in the relevant market, financial performance to date, and anticipated revenues in the immediate future based on the existing revenue streams. Ultimately, understanding valuation is not as important as realizing that the value assigned is not the most important metric, as there are so many financial issues at stake.
There is a common myth that once a larger company merges with or takes over a smaller company that a lot of the people who were a part of the smaller operation will be left out in the cold. Although downsizing and massive layoffs may occur, sometimes retaining the existing personnel can be a part of the negotiations. Rather than fixate on the financial aspects of a prospective deal, companies should ensure that they know exactly what will happen subsequent to the closing and that any special terms or conditions are in writing.
Mergers and acquisitions are fairly routine transactions, but that does not mean that they all proceed in the same manner. Any company that is contemplating an offer has to consider a number of competing factors to ensure that it is the right move for the business. Thus, understanding the deal and everything it brings along with it is imperative or both parties risk wasting a lot of time and money.