An acquisition deal refers to one business acquiring another in order to gain a competitive advantage or expand its customer base. The acquiring company may also wish to eliminate competition or reduce costs. The process can be difficult and time-consuming. Expert advice is usually sought to ensure that the transaction goes smoothly.
Typically, the parties will sign a letter of intent (also known as a memorandum of understanding or term sheet) at the beginning of an acquisition process. This is non-binding and outlines the proposed key terms of agreement between the two parties. It can include financial headlines, a breakdown of assets, corporate structure, SWOT analysis and the details of how the deal will be structured.
The next step in the process is completing due diligence on the target company. This involves reviewing its financial statements, assessing purchase valuation and examining legal matters. It is important to ensure that the company is financially sound and that its purchase valuation is in line with industry benchmarks. A heavily indebted target is often a red flag and may pose future liabilities for the acquirer.
Once the due diligence has been completed, the final step is to negotiate the definitive acquisition agreement. This will detail how the share or assets are to be transferred between the two companies and includes information on the transfer price, warranties, indemnities and any limitations that would impact the acquisition. It also outlines how the target company is to be integrated with the acquiring company and may include clauses on future liabilities, customers, brand names and tangible items in its inventory.