During this step, representatives from the buying company choose whether they want to continue pursuing a deal. If they do, they send an LOI or letter of intent to express interest in a purchase and provide a summary of the proposed agreement.
The company sold in private deals may not act as a deal participant. However, it typically must facilitate the buyer’s due diligence evaluation.
M&A is a common strategy for companies to grow, and research shows that companies with strong core businesses can leverage acquisitions to realize their growth potential. Engaging in M&A is a high-stakes activity that requires a significant investment of time and resources. To avoid a deal failure, it is vital to understand the M&A process from start to finish.
M&A starts with high-level discussions between interested parties. A consultant or banker can connect the parties and facilitate these discussions. These conversations focus on value exploration and business fit rather than specific deal structures.
The acquiring company must objectively evaluate the target company to determine its fair market value. It is typically done by comparing the target to similar businesses in its industry and using metrics. The most common metric is price-to-earnings (P/E), which considers past and future earnings. The acquiring company must also understand the target’s business model and strategy to determine how its assets and employees can be utilized in the new combination entity.
In buying or selling a business, rigorous due diligence is necessary to ensure a victorious M&A deal. Due diligence involves carefully examining all aspects of a company to confirm facts and financials, identify potential issues that may affect valuation or complicate the deal, and determine closing conditions and special indemnities to negotiate.
A key aspect of due diligence is assessing the strength of the management team and culture fit. It is significant for buyers in a transaction involving the target’s employees. For example, the buyer wants to know if founders and executives are vested in stock performance and how long they intend to remain with the firm after the transaction.
As a seller, it’s essential to stay organized and ready for what can seem like endless information requests during the due diligence process. M&A lawyer Denver is fully equipped to handle all aspects of due diligence preparation, including providing stock certificates, cap table information, and seamless offboarding services post-sale.
Getting an M&A deal closed often involves a complicated and time-consuming process. While each agreement is unique, completing a significant public merger typically involves multiple teams, including lawyers in various states and countries, financial advisers, human resources, tax and antitrust specialists, environmental and corporate security consultants, proxy solicitors, escrow agents, financing sources, and insurers.
M&A deals begin with high-level discussions between buyers and sellers. It is an opportunity for both parties to explore how they could fit together strategically, whether their values align, and what synergies would be realized.
Once buyers choose the target company, they negotiate their acquisition and merger terms. It can be a complex process because of the valuation gap between what the target thinks it is worth and what the acquirer is willing to pay. It also requires negotiating several highly-negotiated deal terms to bridge the gap.
M&A deals are often high-value, high-stakes transactions requiring much data and detail. It’s essential for M&A professionals to know how to perform valuation models, produce pitchbooks and financial models, and create accurate reporting.
In M&A due diligence, buyers examine the target firm’s assets and liabilities, operating data, culture fit, and external conditions that could affect the deal. They may also hire consultants to assess these issues.
Once a buyer determines that a target company will make for an excellent acquisition, it proposes the terms of a proposed transaction in a term sheet or letter of intent. This document typically includes the purchase price (and its adjustments), the earnout structure, indemnification and escrow, special closing conditions, and exclusivity or no-shop provisions.