M&A is a complex area of practice with a number of special considerations and there are many ways to budget for it. Further complicating matters, different industry sectors exercise different practices in terms of integrating acquisition activities into their overall budgets.
A budget is a management tool that helps an organization plan, control costs and maximize profits. When it comes to M&A transactions, the ability of Budgeting Consultants to know what the budget is for the divestment process can help ensure that it gets done in time and on budget. Company mergers and acquisitions are a critical part of the business world, and they’re more common than you think. Every year, thousands of companies purchase other companies to expand and grow their customer base. These deals are done using a variety of different strategies, but regardless of which strategy is used the amount that is paid will always be determined by the value of both companies in question.
After the acquisition is complete, the company buying the other will look to take control and begin to streamline the combined business. This is where mergers and acquisitions budgeting comes in. In order for the combined company to come out stronger, it must first know how much money it has to work with and how it should be used. The most common way for this budgeting process to work is for top executives of both companies to meet together and discuss their future plans as a single entity; at this time they will create a budget that both sides can agree upon.
The more complex method involves some initial research into both companies involved. This is done to determine if there are any factors that could affect the value of the company being purchased. This type of research normally includes getting information on the market value, customer base, potential growth, profit margins, and other factors that will influence the initial price. The final budget will be based on these factors.
Mergers and acquisitions budgeting is a multi-faceted process that must be done properly in order for it to achieve maximum effectiveness. In addition, it can be easy for a company to get caught up in making deals without considering future consequences. Companies should always make sure that they go over their options carefully before signing a contract; especially if the deal was not initiated by them.
Mergers and acquisitions can be an expensive undertaking, so it’s important to be prepared with a financial plan before you start diving into gathering information. So what should you know before putting together your budgets? Follow these three simple steps to ensure that your finances are in line for any potential set-backs or changes that may occur during the process.
How to allocate financial resources (Budget) for a deal
Step One: Set Your Transaction Budget
This is one of the most overlooked aspects in M&A, but it’s crucial and needs to happen sooner than later. Many purchase agreements require that the deal be balanced out within a set timeframe. You should know in advance how much cash and what type of financial support you’ll need to accomplish this goal, so you can plan accordingly.
Step Two: Know What You Need for Post-Closing
This is a very important step in maintaining your budget after the deal is closed. Just because the transaction is over, doesn’t mean you’re done with financing it – it only means that your transaction is complete. Many times in M&A, there are additional costs that arise during and after closing that can have a huge impact on your bottom line (i.e., lawyers’ fees, administrative costs, etc.). Make sure you have a solid plan for those costs and have been prepared for them in advance.
Step Three: Manage Your Finances Once the Deal Is Complete
This step is crucial too. If you’re not prepared to manage your finances once the deal is complete, then you should take some time up front to prepare to mitigate any issues that may arise. It’s best not to have a situation where your cash flow is tight (i.e., trying to get too much done at one time), which can serve as a distraction or stressor if it’s unexpected or out of control.
The process of financing an acquisition or merger, during which a bidder assumes the obligation to acquire ownership and assume some or all of the liabilities of an existing target. In return, the acquiring company obtains control over assets and cash flows that are typically undervalued by their potential or market value. In general, there are two types of deals: those that involve cash payments for assets and those that do not.
The key factor in deciding which type of deal is best is what objective should be prioritized. Keeping an acquisition or merger within budget is important, but not as important as making a deal that creates value for shareholders.
The process of allocating resources (budgeting) e.g. cash and investment, to an acquisition or merger involves four key questions for financial advisers:
i) Where to obtain the funds?
ii) How does the bidder’s management plan to allocate these funds?
iii) What are the key risks and opportunities for value creation?
iv) Will the bidder be able to realize any potential gain associated with a transaction?
Financial risks related to change in business strategy, legal issues, political risks, competing bids from other parties, integration challenges, competition law compliance issues, unexpected tax issues and currency fluctuations are also at play.
The financial allocation process begins with preparing a funding strategy. Then, the deal team must identify the key risks and opportunities, and develop a new capital structure or business plan. It must clarify the company’s belief of what is possible in terms of value creation, not just how much it needs to spend.
Any new arrangement involves risk and uncertainty, but it is always better to be conservative rather than overly aggressive in this area because unpredictable events can have a big effect on the outcome.
Some financial advisors will also identify other sources of funding for the bidder’s intended deal (e.g. from private equity or hedge funds). This could be a useful tool to mitigate risks, but at the same time it can backfire and make the deal unattractive to potential bidders.
To identify potential acquisition or merger targets, bidders must focus on ones that may have potential synergy or value creation opportunities, as well as ones that remain undervalued by their market value. A good approach is to first identify a list of companies that match their business model and industry with an eye towards large markets and attractive returns on investment (ROI).
The next step involves analyzing these potential targets to determine which ones combine the highest value and lowest cost. The bidders must then prepare an offer.
Once they have identified a company that they believe is undervalued and represents a good target, the bidders will analyze their own organization (i.e., financial resources, organizational structure, management team) to determine if they have what it takes to complete the transaction. They must also consider “contingent value arrangements” that may be part of any deal (i.e., earnouts, merger payments). A professional analysis of the target’s patents will help them predict profitability and forecast future revenues based on expected cash flows.
In some cases, there is an opportunity to acquire a company at a discount (e.g. when an existing company is offered at a price lower than its net asset value). In other cases, the bidders might offer superior terms and be able to negotiate the acquisition of the target at or near its fair market value.