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mergers and acquisitions guide

The Buyer’s Perspective: Mergers and Acquisitions in the USA

Buying a business and pursuing M&A deals as a buyer have considerable differences. To ensure you get a head start in the process, we offer a step-by-step guide that details the buyer’s perspective during mergers and acquisitions.

In the world of investment banking, there is a lot of buzz about the buy-side of mergers and acquisitions, which largely deals with buying securities or companies that are listed for sale.

The buy-side involves buying businesses for companies and clients who are looking to spread their wings. Generally, professionals who manage the buyer’s side of operations focus on helping companies build their portfolio and acquire businesses.

Apart from this, they can also be seen raising capital to buy stocks and securities for their employers, which allows them to suggest different modes of investments and saving instruments. This article covers the buyer’s side of mergers and acquisitions, as well as all the details regarding its processes.

Before we begin, you may find it useful to revisit our guide on the general M&A process.

What the Buy-side Process Consists of

When it comes to buy-side mergers and acquisitions, companies employ several different strategies to identify and decide whether they should buy a certain business or not. While buying a traditional business is much different from pursuing M&A targets, there are similarities, so it may be worthwhile refreshing your memory on the general buying process.

In M&A deals, each company goes through a certain process to seal the deal and usually employs an investment banker or banking firm to oversee the entire process.

A basic buy-side M&A process would look something like this:

  • Defining the merger or acquisition criteria
  • Making a list of potential acquisition targets
  • Initiating contact with targets
  • Conducting preliminary valuations
  • Beginning the negotiations
  • Performing due diligence
  • Securing finances

Let’s go over each of the steps in greater detail.

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Defining Your Criteria

Whenever a company decides to undergo a merger or acquire another business, they need to have a solid plan of action in place. This plan starts by defining the criteria for the merger or acquisition, which is highly essential. The criteria will help the company define the purpose of the process and help it determine whether a certain business fits the bill or not.

There can be several reasons for which a company would decide to merge with or acquire another business. Perhaps they want to enter a foreign market where penetration for a new business is more difficult, or they want to expand their capabilities and grow the business. Some large corporations use M&A as a strategy of eliminating competition, while others do it to consolidate the performance efficiency of the two businesses.

Whatever the reason may be, it is important for you to be clear on the criteria before moving to the corresponding steps. There is no boilerplate or standard template that you can use for every M&A that you undergo, and this step may take more research than the others. Not only does it help you get sound criteria, but it also defines your expectation of the company you are going to merge with or buy.

Making a List of Targets

basis of acquisition

Once you have gotten the acquisition or merger criteria out of the way, you arrive to another important task: identifying the potential acquisition targets. With the help of your buy-side M&A advisor, you will already have the criteria in place, which will help you narrow down companies that you can buy or merge with.

This process is a highly crucial one, and it also requires a lot of confidentiality. Usually, when a company is the target of a merger or acquisition, the stock prices rise for other companies in the specific industry, mainly due to the expectation that they may also be on the list.

Initiating Contact with the Targets

Getting in touch with the possible targets can be a challenging and delicate process. While there is no best or suitable way to go about it, you can pretty much derail the entire process by coming on too strong or being too blunt regarding the reasons why you are pursuing the transaction.

Consider this: you have a potential target that is known to be struggling with its finances or production. Although they may be the best possible targets for your company, you can’t approach them and say, “we want to buy your company because we know you are struggling with finances or production.” If anything, this would create a negative impression for your company throughout the market.

The first thing you need to do is to approach the situation by putting yourself in the seller’s shoes. This would help you address several doubts and queries, i.e., who the buyer is, what they want, what their financial standing is, whether they have an ulterior motive, and so forth.

By addressing these queries or preparing yourself to answer them, you will gain more confidence, and the seller will be able to see that. Naturally, they won’t respond well to hesitation or uncertainty, which is why you should do your homework.

Moreover, you should always try to stay to the point, but make sure that you share all the relevant details regarding your acquisition plans with the seller, so that you can both be on the same page. If you come on too strong or become aggressive, they might show you the door before you can even get to talking terms and negotiations.

While preparing yourself for the initial contact, you should also remember that the seller will start researching all there is to know about you the moment you get in touch with them. This means that you need to review the overall image you have in the business sphere. Your acquisition targets will use different means and methods to find out everything they can about your business, company size, financial situation, performance, work ethics, values, and several other factors.

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Conducting Preliminary Valuations

Now that you have conducted initial contact and gotten in touch with your potential targets, it is time to determine how much value they can bring to the deal. The valuation process is also vital, as it helps the company receive a fair and unbiased value of the company they are going to merge with or acquire.

If you have partnered with a buy-side M&A advisor, they will be able to use different valuation methods and strategies, the most basic of which is the discounted cash flow analysis.

In this method, the added earnings from the merger or acquisition are adjusted according to the current value terms. If the potential earnings from the acquisition or merger exceed the cost of the M&A deal, then you can expect the new business to be beneficial for your company.

However, this isn’t the only metric that you can use to determine the valuation of the company you are looking to acquire. Several other factors are also input to retrieve a valuation range, and these include future sales growth, risk levels, cost efficiency, and other factors.

Starting the Negotiations

kicking off the negotiations

Now comes the time to begin negotiating the business, which is considerably different for buyers as it is for sellers. For this purpose, you should have a dedicated and experienced team of professionals who are well-versed in M&A negotiations so that your interests are represented well, and you don’t end up with a bad deal.

The first thing you need to do is your homework. Research everything you can regarding the company you are entering into negotiations with. Before you get into a room with the sellers, you should know their company as well as they do. This would give you the upper hand in the negotiations. There will be several questions and concerns that they might ask you, which is why it is better to be prepared.

When you are conducting research, make sure to determine the lowest offer you will make, as well as the highest you can go. Even so, you should leave some flexibility for bargaining, and your offers should also be fair and respectful to the seller. Before making the offer, you should ask yourself certain questions, which include:

  • Will you require financing to complete the deal?
  • Does the sale depend on the business’s performance?
  • Does the business have modern or outdated inventory or equipment?
  • Will the seller remain onboard after the sale? If yes, how will they be compensated?

Apart from these, you can consider several factors while preparing for negotiations. Moreover, you should maintain a professional and cordial relationship with the seller, and it should be based on honesty.

You don’t have to lie or hide certain things to finalize the deal, because it would spoil the relationship once the seller finds out about it. The risk of the deal is also tilted more towards the buyer, so you have to maintain your integrity.

Performing Due Diligence

The due diligence process is considered the most important one in the buy-side process. It involves an extensive analysis of the company that you plan on acquiring or merging with, with a particular focus on its financial condition and fiscal performance. M&A advisors and experts can help you analyse the company’s information to determine whether the deal can be beneficial for the buyer or not.

The due diligence process also helps in financial modelling, which can determine the incremental value that the buyer’s business will experience. The process will culminate in the generation of projected financial statements for the seller, which give you a clear picture of the company’s future performance, if all the other factors are kept constant.

In essence, the due diligence process not only determines the seller’s projected financial performance, but it also highlights the company’s strengths and weaknesses.

Securing Finances

Once you have identified potential targets for mergers and acquisitions, and have also conducted due diligence and negotiations, it is time for you to gather the funds involved in the deal. Most of the time, buyers don’t have the required capital to acquire or merge with the sellers’ company. Therefore, they need to borrow money in order to seal the deal.

There are several means through which the buyer can secure finances for the M&A transaction. Commonly, buyers go to banks in order to receive the funds they need to buy another business. Banks offer different types of loans to help businesses, and you can choose one that suits your requirements. Some of the other sources of financing include finance specialists, government loans, private investors, venture capitalists, and even crowdfunding.

Closing the Deal

After the terms of the merger or acquisition have been agreed upon, the buyer has completed their due diligence for the seller’s company, and the funds are in place, the board of directors for both parties would convene to approve the transaction and take care of any last-minute requirements.

This step may also involve the investment banks or M&A advisors of both sides, who will submit a report about the transaction to their respective clients.

Once the transaction is approved by the shareholders, it can be executed and finalized.

The buy-side mergers and acquisitions process is much different from the sell-side, and it has a more comprehensive and detailed role for investment banks or advisory firms that assist the buying company in the deal.

It is important to seek assistance from a reputed and experienced advisory team in the process, from defining the acquisition criteria to closing the deal.

If you are looking to acquire another business for growth, expansion, or any other purpose, is here to support you. To find out how we can assist you in your purchasing journey, get in touch with us today.

Find out more: Want to know more about the sell-side of M&A? Read the seller's perspective in mergers and acquisitions.

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