How to Evaluate an M&A Deal?

The Buyer’s path through the M&A deal is usually more complex and multifaceted than the seller’s. The need to evaluate the object of acquisition, both each asset separately and the entire business comprehensively, and to integrate the acquired asset into the existing structure of one’s own business – all this poses to the Buyer a greater number of questions and items in the checklist of the agreement than to the seller. Not surprisingly, the price of an error in the M&A transaction process for the Buyer is higher. Below we will highlight and deal with the most common of them.

Lust for the Deal

Sometimes too much desire to acquire an asset prompts the Buyer’s management to overlook obstacles on the way to the set goal. But if such acquisition does not make sense from a financial, legal, or technological point of view, it can only lead to losses in the future.

To avoid this trap, it is worth collecting and analyzing the maximum possible amount of information about the object of purchase. It is best for the Buyer to have a complete valuation report with key business information – including tax returns, financial statements, organizational structure, etc. – before making a final decision. This will help determine the potential risks and costs in the future, as well as the true value of the transaction.

Not Everyone Checks the Transaction for the Need to Obtain AMCU Permission

If one business intends to acquire another business, it does not mean that it can do so. Quite often, when planning an M&A deal, the Buyer forgets to check the structure of the deal for the need for its “antitrust clearance.” Such an omission can have financial consequences primarily for the Buyer.

In order to avoid the possible risk of receiving a fine from AMCU upon completion of the transaction, at the stage of its planning, it is worth contacting a specialist in the field of antimonopoly law in order for him to analyze the history of the formation of the group of companies of both the Buyer and the seller, as well as to check whether the financial limits have not been exceeded the indicators of the participants of the concentration and whether such a concentration does not require the prior permission of the AMCU.

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Failure to Conduct Full Due Diligence

The due diligence involves identifying and researching sufficient information about the target company to enable the Buyer to make an informed decision on whether or not to acquire the target company. And if you buy, what guarantees regarding possible risks in the future should you get from the seller.

Quite often, when preparing for a transaction, the Buyer conducts only a selective inspection of the most vulnerable (in his opinion) parties of the target company and its assets. It happens that due diligence is not carried out at all due to the need to close the deal as soon as possible and the exclusivity of the circumstances (exclusivity of the offer, friendly relations between the parties to the transaction, etc.). Such an approach is extremely risky and resembles the purchase of a car with mileage without checking its technical condition, so to speak, without looking under the hood. In practice, in most cases, buyers who do not conduct sufficient due diligence after acquiring an asset face risks and losses that could have been avoided.

In order not to make this mistake, you should not “cut corners” in the transaction process. The Buyer must know everything about the target company. To carry out due diligence, it is worth involving specialists who already have experience in conducting audits of enterprises in the relevant industry, can identify all risks, and will help assess the cost impact of each such risk on the price of the transaction.

Conclusion of the Agreement Without a Personal or Other Secured Guarantee From the Seller

Quite often, the seller, preparing the target company for sale, withdraws it from the structure of its own group of companies and transfers its corporate rights to the ownership of a separate holding company that has no other assets and does not carry out any activities. As a result, having received funds from the sale of the target company, such a temporary holding company withdraws funds (disposes of them) further and remains with receivables. For the Buyer, entering into an agreement with such a temporary holding company completely eliminates the possibility of indemnifying losses or holding the seller liable in the event of a violation by the seller of the assumed guarantees or other terms of the agreement.

To avoid this mistake: if the seller company, in addition to the asset that is the subject of the M&A agreement, has no other assets or they are clearly insufficient to cover possible claims of the Buyer, it is worth providing in the structure of the agreement for the beneficiaries of the seller to provide a personal guarantee and/or to provide a property guarantee by others by companies from the seller’s group as a guarantee of fulfillment of obligations under the agreement.

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