Mergers and Acquisitions: Reasons Why You Should Hire an Advisor

A corporate merger or acquisition can have an exponential effect on growth. They are designed to bring about positive change to a business's finances through the prospect of a deal. These deals aren't straightforward with clear-cut lines. They are working parts that morph and change shape from beginning to end. For a merger or acquisition to be successful, companies should hire a trusted advisor to mediate the transaction and streamline communication. Because of the complex nature of these financial transactions, let's take a look at how they work, how you'll benefit, and where they can go wrong without professional help.  

The Difference Between Mergers and Acquisitions

Business mergers and acquisitions have different meanings, but some individuals use them interchangeably. An acquisition is the process of one company absorbing another and establishing itself as the new owner. The purchased business ceases to exist from a legal standpoint and is unable to trade on the stock market while the buyer is still able to do so. 

Mergers are a little complicated, but the bare bone structure is set up when two companies, roughly the same size, move forward as one brand new single entity. This deal means they are no longer separately owned and operated, they give up their stocks, and new stocks are issued in their place. A merger like this is usually referred to as a "merger of equals." 

There is another type of merger, which involves purchasing the company. CEOs agree to move forward in business together because it is better for both of their companies to operate as one unit rather than two separate. Where the line is between being a merger or acquisition in this type of deal is very fine. Most of the difference lies in how the purchase is communicated to the absorbed business, employees, and shareholders.

Making an Offer in a Merger or Acquisition

There are several ways businesses can discuss mergers and acquisitions. 

Tender Offer

Let's start with the tender offer. This type of transaction revolves around one company buying up stock from another. By doing so, the acquiring company doesn't need to worry about managing the target company but has a controlling interest due to the number of shares they own. A successful tender offer could eventually result in an eventual merger of the two businesses, but this is where it can start. 

Purchase of Assets

In a purchase asset transaction, one company's assets are purchased by another for cash. The buyer might favor this type of deal because it can buy only what they find attractive about the company. It will also limit any liabilities. 

Management Buyout

When companies start talking about a management buyout, the current leaders of the target company is the last piece of the deal and often done through a tender offer. This would result in the company ceasing to exist as a public entity and moving forward as a private one. 

Considerations in a Merger and Acquisition

There are many different options companies have to assess when considering a merger or acquisition. The first is the valuation, or more directly, the price paid in the deal. There are different ways to determine the valuation of a company, and many choose to have an appraisal completed. However, most business owners are going to investigate cash flow and the "time value of money." There are other ways to determine valuation

  • Price-Earnings Ratio - An acquiring company makes an offer based on the potential earnings of the target company. 
  • Enterprise-Value-to-Sales Ratio - In this type of ratio, the buyer makes an offer based on the multiple earnings of the target company. 
  • Replacement Cost - An acquisition formulated on the cost of replacing the target company. 

Regardless of how a price is achieved, there will almost always be a negotiation process. 

How a Merger or Acquisition Can Go Wrong

Mergers and acquisitions contain a lot of working parts which means there is an opportunity for things to go wrong. A healthy stock market encourages mergers to take place, but without the proper diligence, deals can be made in haste without an appropriate strategy in place. The result is a cheap deal that doesn't benefit either party involved. On the other side of that coin is the participation in a merger made out of fear. Often, management can feel they have no choice, and to survive, they must acquire a business before being acquired themselves. Communication plays a significant role in the downfall of a deal. Without exercising a proper discussion, there will be many bumps along the way that will affect the overall execution. 

Mergers and acquisitions aren't straightforward and only require the two businesses involved. There is, however, an entire landscape of individuals who have parts in the play and affect the outcome, such as competitors, customers, vendors, and shareholders, whose relationships with the businesses need to be addressed. 

The Benefits of Hiring an Advisor for a Merger or Acquisition

CEOs often rush into mergers or acquisitions to buy out competition and are often influenced by lawyers, bankers, and business advisors. It's one of the biggest reasons why hiring a third party advisor is ideal when you are considering large purchases. Advisors can help create compelling presentations that accurately define your proposition and identify your business. They also work in cooperation with your team to effectively communicate industry-based valuations on your company. As we previously mentioned, valuation is a critical aspect of the deal, and you'll want some help. 

Whether you are buying or selling, Brindiamo Group can provide the comprehensive support that you need to close the deal. Learn more about hiring an advisor for mergers and acquisitions in the adult beverage industry by contacting us today. 

Jeffrey Hopmayer