What is Required Before a Merger or Acquisition?

Privately owned company mergers and acquisitions raise a slew of legal, commercial, human resources, intellectual property, and financial concerns. Understanding the dynamics and difficulties that typically occur is crucial in effectively navigating a business sale.

The value of a merger or acquisition can be negotiated

How do you tell if a buyer’s bid price is comparable to or more than your company’s value?

It’s critical to realize that the offer price and valuation, like other M&A parameters, are changeable. However, because your company’s shares aren’t publicly traded, the benchmarks may not be immediately obvious, and the success of this discussion will be determined by a number of crucial considerations, including the following:

  • Comparables in the market (do your competitors sell for 3x sales or 12x EBITDA? Are you expanding at a higher rate than your competitors?)
  • Whether the buyer is a financial buyer (such as a private equity firm that may value your company based on a multiple of EBITDA) or a strategic buyer (such as a private equity firm that may value your company based on a multiple of EBITDA) (that may pay a higher price because of synergies and strategic fit)
  • The value that was used in your company’s most recent round of funding.
  • Employees and early stage investors have recently sold shares at a profit.
  • The most current 409A valuation of your firm (appraisal of the fair market value of your common shares)
  • The tendencies in your company’s financial success in the past.
  • The expected financial growth of your organization is
  • Your company’s unique technology, which it owns or licenses
  • Your company’s business sector
  • Your firm is exposed to business, financial, and/or legal threats.
  • The management team’s experience and expertise
  • Chances for subsequent funding rounds and your company’s prospects
  • Whether your organization has numerous bidders or a single interested party,
  • Whether or if your firm is a viable IPO candidate is a question of financial growth.

Your company’s unique technology, which it owns or licenses

Consider an “earnout” as a strategy to bridge the gap between you and the possible buyer if you can’t agree on an acquisition price. An earnout is a clause in a merger and acquisition agreement that permits a seller to receive more compensation in the future if the firm being sold meets specific financial targets, such as gross sales or EBITDA milestones. Although an earnout entails considerable risks for a selling firm and its stockholders, it also offers a route for the selling stockholders to eventually realize the return they desire in the company’s sale, dependent on the business’s continued success after the transaction closes.

Consider a “earnout” as a strategy to bridge the gap between you and the possible buyer if you can’t agree on an acquisition price. An earnout is a clause in a merger and acquisition agreement that permits a seller to receive more compensation in the future if the firm being sold meets specific financial targets, such as gross sales or EBITDA milestones. Although an earnout entails considerable risks for a selling firm and its stockholders, it also offers a route for the selling stockholders to eventually realize the return they desire in the company’s sale, dependent on the business’s continued success after the transaction closes.

Last but not least, don’t be scared to bargain. Consider making a counter offer, even if a buyer’s amount “feels” correct. Buyers almost always make their best offer “concessions.”

Share
This entry was posted in Blog. Bookmark the permalink.