How To Analyze an Acquisition

The risks and potential benefits of buying a business need to be carefully analyzed.You should study the company's finances, assets, and liabilities.Try to find a business that isn't saddled with debt or lawsuits and has a reasonable price tag.How the acquisition will benefit your business should be analyzed.

Step 1: Audited financial statements should be asked for.

Audited financial statements for the past five years should be given to the target.The SEC requires publicly traded companies to file financial statements.You can get 10-K statements online at the EDGAR website.You still want the audited financial statements if the company is private.Five years of statements is enough to create a trend line comparison.You can see if the company's finances are getting better or worse.The cash flow analysis should be included in the financial statements.The report shows how cash is used.

Step 2: Check to see if you can read the statements.

There are red flags when it comes to financial statements.You shouldn't buy a target whose statements are hard to understand.Clean and clear financial statements are what you should look for.It is possible that you need help reading the statements.You should hire an accountant if that's the case.It is possible to find an accountant by asking another business or contacting your state's accounting society.

Step 3: Do you know if the company has been up for sale before?

You will want to know about the earlier sales efforts.The sale fell through, so ask the target why.Asking why they are selling is a good idea.The owners might want to start a new business or retire.Those are good reasons.The business might be losing money.The owners could be trying to leave before they go bankrupt.Unless you know how to turn things around, you should avoid a company that is losing money.

Step 4: A public company's purchase price can be researched.

You can find this information on the stock exchange if the company is publicly traded.This is the cost to buy a share of the company.If you want to buy all of the shares, take the total number of shares and divide it by the share price.If you want to buy only a majority stake, you should take the share price into account.Do you think the market is over- or under-valuing the company based on your analysis of its financials and other fundamentals?Check the share price over time to see if it has recently been inflated.It is normal for a target to try and inflate the price when it knows it will be bought.

Step 5: For the purchase price, ask a private company.

There is no purchase price on the market for a private company.The purchase price will be what the owners want to sell for, so be sure to ask.You need to analyze the price based on the company's assets and liabilities.

Step 6: The company's fixed assets should be valued.

Fixed assets will be recorded in the company's accounting records.You will need to value these assets on the open market.To estimate their value, check how much comparable assets have recently been sold for.Buildings land furniture computer equipment and software vehicles are some of the fixed assets.

Step 7: The company has accounts receivable.

Accounts receivable is the amount the target company can collect from another business because they sold them goods or services on credit.You want to know how much your target can collect.It has been successful in collecting on accounts payable.Request a report about your age.Many clients don't pay their bills on time.You should check to see if there are any outstanding accounts.Try to find out why.

Step 8: Intellectual property is important.

Smaller companies may have intellectual property that is worth a lot.Intellectual property includes things like patents and trade secrets.Check if the target licenses intellectual property from a third party.The target might pay for the right to use another company's patent.You should see copies of the licensing agreements if that is the case.

Step 9: You can request information on employees.

A large part of a company's costs are employee salaries.There is a list of key employees.The total compensation was paid to employees.There is an explanation of employee benefits.A large percentage of compensation is made up of benefits.There are copies of employment contracts.If you lay off employees, check the contract to see if there are any severance packages.Pay your history.Check to see how much the company gives in raises each year.If you buy the target, the current employees will expect the same amount.

Step 10: Analyze the company's debt.

The company has a debt-to-equity ratio.The debt is divided by shareholder equity.If the company has a high debt load, you might not want to buy it.A healthy debt-to-equity ratio is dependent on the industry.Technology companies with a lot of research and development have lower ratios.The financial industry has ratios of 10 or higher.Check the interest rates on the loans.The company's debt load is moderate but it has a high interest rate.You can save money if you buy the company.It is an attractive target for this type of company.When a business is sold, there is a clause in some debt agreements.All debt agreements should be checked.

Step 11: Determine the target's accounts payable.

Accounts payable is the amount the company owes other businesses.A company might owe its suppliers two months of supplies.The target must pay its accounts in a timely fashion.Try to understand why.Is it experiencing a cash flow problem?

Step 12: Information on contractual obligations should be collected.

A target company may have signed contracts.Make sure you understand the terms of the company's obligations by getting a copy of each.Is it possible to negotiate a better deal with the third party?The target company could be an attractive option if that is the case.

Step 13: Do you know whether the company is being sued?

It is normal for companies to be sued.It is normal for a company of its size in its industry to have more lawsuits.The company's pending or anticipated lawsuits should be disclosed.Ask about any lawsuits within the last five years.Copies of the settlement agreements should be requested if the suits are settled.Search online for information about lawsuits.Check with the Attorney General of your state.

Step 14: Potential environmental issues should be identified.

Environmental costs can be much more than you think.You will want to perform an environmental review of the business.The company has environmental permits and licenses.Any correspondence with the environmental agencies.The company uses hazardous substances in its daily operations.There are environmental lawsuits.

Step 15: Take a look at the company's taxes.

You should confirm that the company is paying taxes.To make sure the company has paid the correct amount, double check the calculations.Look for suspicious deductions.A business deduction is needed for a business of its type.Business deductions should be small.A mom-and-pop business shouldn't be deducting jet travel expenses for meeting with suppliers one state away.

Step 16: Look at the strategic fit.

You shouldn't buy a company if you're bored.You want your own business to benefit from the acquisition of the target business.How it will fit into your organization should be considered.Did you do business with the target before?You should have a good idea of how the target benefits you.Does the target have what you need?You can save money by buying the company.Does the target company have a good reputation?How is it viewed by the public?Does the target's brand perception match yours?

Step 17: Consider how difficult it is to integrate the companies.

Some businesses can be folded into their own.Integration might be more complex.You may not be located near each other geographically or you may have very different supply chains.The target's organizational culture should be researched.A company that values trust and recognition could be a great acquisition.A company that has a cutthroat culture might not.Make sure the company's values are in line with each other.Estimate the costs of integration.If the costs are too high, you might not go ahead with the acquisition.

Step 18: Estimate the increase in revenue.

You want your revenue to be enhanced by the acquisition.Determine how much revenue you can expect to make.If you need help with these projections, use your accountant.

Step 19: The legality of the merger should be checked.

Some mergers are not allowed by federal antitrust laws.If you decide to buy the company, you should meet with legal counsel to discuss any issues that may arise.Discuss regulatory issues with your lawyer.If you need approval from the Department of Justice or the Federal Trade Commission, you may have to draft certain documents.You should talk about these requirements with your lawyer.

Step 20: How will you pay for the purchase?

Excess cash, shares, or debt can be used to purchase the company.If you are taking on debt, you need to understand how it will affect your company.You can buy a majority stake in the company.If that is the case, the minority interest is a liability on your balance sheet.Consider how you feel about minority stakeholders.They have the right to inspect the books and vote.

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