Reasons Why You Should Hire an Advisor: Mergers and Acquisitions

Corporate mergers or acquisitions can have a significant impact on growth potential. They are strategic moves aimed at improving a business's financial standing through the opportunity of a deal. These transactions are complex and ever-evolving, requiring the expertise of a trusted advisor to facilitate communication and ensure success. Let's delve into the intricacies of how these deals operate, the benefits they offer, and the potential pitfalls that can arise without professional guidance.

Understanding the Distinctions Between Mergers and Acquisitions

Mergers and acquisitions are unique processes, although they are sometimes confused. An acquisition occurs when one company takes control of another, effectively becoming its new proprietor. This action leads to the acquired company ceasing to exist legally and losing its ability to trade on the stock market, while the acquiring company retains this capacity.

Mergers, while they may appear complex, essentially involve two companies of similar size joining forces to create a new entity. In this scenario, both companies stop operating independently, choosing instead to merge their stocks and issue new shares. This is often known as a "merger of equals."

During this type of merger, companies unite through a purchase agreement. CEOs agree to merge because functioning as a single entity benefits both businesses. The difference between a merger and an acquisition in this context is subtle, primarily concerning how the transaction is conveyed to the acquired company's employees, shareholders, and the company itself.

Presenting an Offer in a Merger or Acquisition

There are various approaches for businesses to consider when discussing mergers and acquisitions.

What is a Tender Offer?

Let’s kick things off with the tender offer. In this type of transaction, one company acquires stock from another, giving them a controlling interest without the need to manage the target company. A successful tender offer could pave the way for a potential merger down the line, marking the beginning of a new chapter for both businesses.

A Purchase of Assets Transaction

In a purchase asset transaction, one company buys another company's assets for cash. The buyer favors this type of deal because they can choose to acquire only what they find appealing about the company, thereby limiting any potential liabilities.

Management Buyout

When companies consider a management buyout, the current leaders of the target company play a crucial role in finalizing the deal, often facilitated through a tender offer. This transition would lead to the company transitioning from a public entity to a private one.

Considerations in a Merger and Acquisition

When contemplating a merger or acquisition, companies have numerous factors to evaluate. The foremost consideration is the valuation, essentially the cost involved in the transaction. Various methods exist to ascertain a company's valuation, with many opting for a professional appraisal. 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 target company's multiple earnings. 
• 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. 

Potential Pitfalls of a Merger or Acquisition

Mergers and acquisitions are intricate processes with numerous elements, creating potential for various challenges. Although a robust stock market might incentivize such transactions, proceeding without thorough due diligence could lead to an unsatisfactory agreement that doesn't favor either party. Moreover, pursuing a merger driven by fear or a perceived need to survive can introduce complications. Clear and effective communication is crucial to sidestep these pitfalls and ensure successful execution.

While the concept of mergers and acquisitions might appear simple, they encompass more than just the two companies involved. A wide array of stakeholders, including competitors, customers, vendors, and shareholders, influence the outcome and must be taken into account throughout the process.

Advantages of Engaging an Advisor for a Merger or Acquisition

CEOs often pursue mergers or acquisitions to secure a competitive advantage, frequently relying on the expertise of lawyers, bankers, and business advisors. This underscores the necessity of engaging a third-party advisor when contemplating substantial acquisitions. Such advisors can help craft persuasive presentations that effectively convey your proposal and business identity. They work alongside your team to accurately articulate industry-based valuations for your enterprise. As noted earlier, valuation is a pivotal component of the transaction, and having expert support can be immensely beneficial.

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.