Companies do not just buy other companies for no reason. To get the most out of the purchase, they need to compare their own company with that of the one they are trying to buy, which is called a comparable transaction analysis in mergers and acquisitions. These are done to find areas on which they need to improve or expand upon after purchasing it. It can also show whether or not buying another company is worth it in order to succeed in competition.
How is a Comparable Transaction Analysis conducted?
The first thing to be considered is the type of business one is interested in. This will differ from one industry to another and may even differ from other businesses in the same industry. It is important that whatever you choose is a part of the company’s strategy for survival and advancement in the market. One should be able to explain why it would fit into the company and what it could do for the business and how it can help win the competition against other companies.
An understanding of their type of revenue, which can be either gross or net profit depending on what type of accounting methods they use. This is also needed for personal comparison to see if it meets its projected revenue and to determine whether or not it is worth buying at all.
A number of other comparable figures between the two companies would also be important, but these will differ from one industry to another with the major ones found in the company’s annual report and latest financial figures. The important financial figures can include, but are not limited to:
EBITDA – Earnings before interest, tax, depreciation and amortization. This should give a clear picture of what their profits are before any accounting errors or lying is done.
Net Debt – after all expenses and depreciation is deducted. This shows what will need to be paid to to take over the company and how much time it will take for debts to be paid off.
Cash – what money is left to run the business after covering its monthly expenses. Estimate as many of these as possible as it helps in making decisions that would help the business grow faster and faster as it gains more income with each passing year.
Analyze how the company works compared with the operations of the acquiring business. One of the best ways to start this is to make a simple table. The first column should be the name of the company, and the second should be the company’s strength as well as what they could do better.
The last step is to compare the acquiring company with the acquired one. Before even starting the comparison of numbers and figures, it is very likely that the strengths and weaknesses would have been known simply by looking at them and hearing about their reputation in the market.