A Startup Guide to Merger and Acquisition

Large companies that want to expand their business further may look to smaller companies that they can buy through mergers and acquisitions (M&A). If you receive M&A offers from companies that are planning to acquire your business, it means they see your company as a way for them to achieve more growth, with all the profit they can potentially make.

Several factors may put you on the list of top target companies, which refers to businesses that are being acquired. For one, there’s the concept that start-ups promote team productivity thanks to a young talent pool that’s as competent and efficient as workers from older demographics.

Another reason may be the technology that you’re using. Buying a company that already has a software, platform, or any other piece of technology that’s well established makes a lot more sense than building something from scratch.

Branding may also play a role in helping maximize M&A value creation for both parties, namely the acquiring company and the target company. Even if you have a small company size, being a brand that’s recognized for expertise and excellence can bring several M&A proposals to your doorstep. Meanwhile, the acquiring company doesn’t need to work as hard in building a name for the new venture.

To help you assess which M&A’s you want to pursue in the near future—whether as a buyer or as a seller—you need to know the ins and outs of this particular business strategy. Your guide to M&A’s should educate you about the following aspects:

1. Types of M&As

• Horizontal—This is when your company and the other company are in the same line of business, meaning you’re competitors who want to buy the other party’s business.

• Vertical—In this scenario, you and the other company are in the same industry or business, but the area of specialization is different.

• Conglomerate—If two companies that are in totally different lines of business go into an M&A deal, the acquiring company doesn’t only intend to diversify its business, but also spread the risks by acquiring new assets.

2. M&A Process

M&A deals can take between six months up to several years to process, depending on how complicated the agreement is. The whole process involves several stages, which may include the following:

• Developing an M&A strategy—Here, the acquirer draws up a plan to have a clear idea of the possible gains that may result from the M&A. Typically, the purpose of buying a company may be to expand the business and its offerings, look for new markets, and so on.

• Setting the search criteria—The buyer determines the viability of a deal by looking at the target company’s size, geographic location, customer base, net value, and profit margins.

• Looking for potential M&A targets—Based on the search criteria mentioned above, the buyer starts searching for companies that best meet its requirements.

• Planning the acquisition—The acquirer reaches out to one or more companies that have the potential to offer good value for the business. During initial conversations, the acquirer tries to get more information about the target company to gauge if it’s amenable to an M&A deal.

• Analyzing the M&A valuation—If the preliminary meetings look promising, the buyer will request the target acquisition company to submit relevant financial information to determine or evaluate the suitability of proceeding with the deal.

• Making negotiations—Once the acquiring company has ascertained the value of the target, the next step is to create an initial offer. Both parties may attempt to bargain or negotiate, so the next round of talks will be about discussing each other’s terms in more detail.

• Performing due diligence—Due diligence is defined as “reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something.” 

In M&A deals, due diligence involves making a complete and thorough examination and analysis of all aspects of the target’s business, including its financial metrics, assets and liabilities, customer base, employee size, and the like. The goal is to confirm the accuracy of the target company’s value.

• Executing the purchase and sale contract—Upon completing the process of due diligence with no issues whatsoever, a sale contract will be made. Both companies will decide on the terms and conditions, including the method of payment which can be any one of the following:

• • Stock Purchase: The acquirer provides cash or stock, or a combination of both, in exchange for shares of the target company.

• • Asset Purchase: The acquirer buys the target company’s assets, so the company being acquired will need to settle its outstanding debt on its own. 

• • Cash Offering: The M&A project is to be paid off in cash.
• Finalizing the financing strategy—Should there be adjustments needed on the financing options on the part of the acquirer, the final details will be settled at this point.

• Implementing the integration—The M&A has been finalized, so the next move is to integrate the two companies’ finances, organizational structure, processes, and so on. Integration may take months or years to complete, so there has to be a regular monitoring and evaluation process, as well.

Don’t let the intricate details of M&A’s overwhelm you. Consult the experts to ensure that you hit your business targets through M&A’s that offer excellent value for your organization.