An acquisition deal occurs when a company agrees to buy another business, usually through a share or asset purchase agreement. The purchaser will conduct due diligence on the target firm and then negotiate the transaction terms with the current owner. This can involve negotiating the sale price, the amount of any cash being paid for the business, and indemnities and limitations on future liabilities. These terms are typically included in a Share Purchase Agreement (SPA) or an Assets Purchase Agreement (APA).
There are a number of reasons to take on an acquisition deal. These may include cost savings through streamlined operations, or the opportunity to gain market share in new territories by expanding a business’s customer base. Companies also sometimes make opportunistic acquisitions, such as JP Morgan’s 2008 “fire sale” of Bear Stearns, in which it purchased the firm for less than its intrinsic value.
One of the most common issues with acquisition deals is poor due diligence, which can lead to overpaying for a target company. When a buyer puts too much emphasis on the target firm’s best-case scenarios and growth assumptions, they run the risk of paying too much for a company that will not deliver the expected return on investment (ROI). A financial advisor can help a business avoid overpaying for an acquisition by providing an independent valuation of the target company.
It is also important to understand the emotional impact of an acquisition for the target company’s owner and employees. If an owner feels excluded from the process, it can lead to a lack of support for integration that can slow down the process and cause cultural clashes in the combined entity. It is therefore advisable to establish clear communication channels with the owners from the outset and solicit their feedback.