Undertaking M&A, or mergers and acquisitions, is a significant leap for any business. While it requires a substantial amount of time and funding, it also holds the potential to significantly improve your business financials. However, it's crucial to manage the process effectively to avoid potential negative consequences.
In this post, we will delve into the implications of mergers and acquisitions on a business. Navigating such a significant endeavor is a complex journey. As an entrepreneur, grasping the risks and potential issues is essential to being well-prepared.
M&A Basics
Larger enterprises can often build or provide products and services cheaper and more efficiently. Companies sometimes buy other businesses to grow larger and gain the advantages of scale.
Mergers and acquisitions are large, crucial, and complex projects that can bring about significant changes in businesses. Due to the intricate nature of the acquisition process and its involvement in various areas, it often necessitates the expertise of many advisers.
One of the most important questions when considering a new acquisition is how much the company is worth. To establish its value, you can compare it to similar organisations and estimate future profits.
Once the purchase is complete, it may need to be reorganised, and new responsibilities be assigned.
Efficiently managing finances is sometimes overlooked during such complex transactions. Genome - digital banking solutions - can streamline financial operations. It makes it easier for them to handle the financial intricacies involved.
Common Issues in M&A
Mergers and acquisitions are inherently very complex matters. There are four areas of major concern that buyers and sellers need to be mindful of during a merger and acquisition:
Earn-Outs
Both sides have different perspectives on an earn-out. From a seller's perspective, they want to maximise the opportunity to achieve the earn-out and have as much control over that process as possible.
The buyer, on the other hand, wants to maximise its control over running the business going forward. There is a real dynamic between the buyer and the seller regarding who controls achieving the earn-out and who controls the business or that particular business unit moving forward.
Cash Over Equity
A seller typically desires cash over equity within an M&A transaction, especially in an auction environment with multiple bidders for the same asset. Among these bidders, the one offering the highest amount of cash typically prevails. Compared to others who might offer a higher purchase price but include more equity in their consideration.
If a seller believes they will have some control over the company's value post-closing due to their involvement in the transition and beyond. They may see receiving equity as a viable option. Any increase in the company's worth would also increase the value of the equity they received over time.
The primary reason an acquirer might prefer using equity over cash is if the seller believes the marketplace undervalues the true value of the equity. The decision on whether to use cash or equity as a consideration in a deal often hinges on whether the equity is perceived to have significant value.
Working Capital
Sellers want to benefit from a deal and be able to take the profits out of the business that they've generated over time. They don’t want to give away a business that has too much cash or working capital.
Typically, the buyer will come in and do a very close analysis of the selling business's historical performance over a defined period of time.
Buyer and seller will then negotiate together to determine a typical target working capital, which is how much cash and other types of working capital need to be in the business for a month or two of operations.
Tax Considerations
Typically, the structure of the transaction will result in immediate tax consequences for both buyers and sellers. An asset purchase transaction is ideal for a buyer. They will get what's called a step-up based on the assets that they acquire from the seller.
They'll be able to depreciate those assets over time and thus be more profitable post-closing. That's not a good situation for sellers because the selling corporation will pay a tax on the assets that are sold.
Then, when that money is left and divided among the owners of the selling business, they'll be taxed a second time. So, it's a two-level taxation, which is not ideal for business sellers.
To Wrap Up
Mergers and acquisitions are complex, but many companies believe carrying them out is sound business. Going through an M&A will significantly impact your business. So, you should better understand its implications before making any moves on mergers or acquisitions.