Avoid overpaying when making a business acquisition

Avoid overpaying when making a business acquisition

On Behalf of | Jun 14, 2021 | Business Law

An acquisition or merger can have major implications for your company. It can immediately increase resources or eliminate a competitor. It can help you tap into a pool of skilled workers and give you access to proprietary processes and recipes.

Unfortunately, acquisitions often don’t benefit a company’s bottom line either in the short term or in the long term. Businesses can make many mistakes when acquiring another company, but perhaps the most serious issue involves paying too much for the new business. How can you ensure that your company doesn’t overextend itself during an acquisition?

Don’t accept the purchase price at face value

In any sale transaction, the seller wants to make as much as possible. They may ask for more than they think that their assets would reasonably command so that they have room to negotiate. When it comes to selling a business, there are many opportunities for the inappropriate inflation of the company’s value.

A seller may not disclose liabilities or issues that it has had with workers or machinery in recent weeks. They may have created fantastic sales projections that seemingly justify a high asking price.

As with any other major transaction, your company needs to know the true value of what you intended to acquire. Assessing the company and establishing its fair market value can help you counter a high asking price with a more realistic one.

Include contingencies with your offer

Placing requirements or obligations on a seller isn’t just something that happens during real estate transactions. Contingencies can also play a major role in a business acquisition transaction.

You might require that executives stay on for a certain amount of time or only agree to a particular selling price if a specific percentage of senior staff stay with the company for at least a full year. Contingencies might also include requiring inspections of any real estate holdings or machinery to ensure that the value quoted during the negotiations reflects the current condition of those assets. By limiting when you will complete the sale, you protect yourself from fraud and misrepresentation.

The more carefully you research and aggressively you negotiate during a merger, the less likely such a transaction is to hurt your company’s bottom line.