Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.
The terms mergers and acquisitions are often used interchangeably but they differ in meaning.
In an acquisition, one company purchases the other outright. A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name.
A key consideration in any M&A is the importance of knowing if a buyer’s offer price equals or exceeds the value of your company. It is important to understand that offer price and valuation, like other terms in M&A deals, are negotiable.
That said, since your company’s shares are not publicly traded, the benchmarks may not be immediately clear, and the outcome of this negotiation depends on a number of important factors such as market comparables. A company can be objectively valued by studying comparable companies in an industry and using metrics.
You should also know whether the buyer is a financial buyer such as a private equity firm that may value your business based on a multiple of EBITDA, or a strategic buyer who may pay a higher price because of synergies and strategic fit.
In the event you and the potential buyer are unable to agree on an acquisition price, consider an “earnout” as a way of bridging this difference of opinion.
An earnout is a contractual provision in the M&A agreement that allows a seller to receive additional consideration in the future if the business sold achieves certain financials metrics, such as milestones in gross revenues or EBITDA.
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