M&A deals are a great tool to boost your company’s growth. They can increase the variety of products you offer, allow you to penetrate new markets, and create revenue streams that may not exist before. However these benefits don’t always occur and there are a myriad of issues to be aware of to avoid when considering M&A opportunities.
One of the most important aspects of M&A is determining how to structure the transaction. One method is to include a Transaction Assumptions tab in your model that will assist you to find an m&a transactions appropriate Purchase Price range or an exact proposed Purchase Price. With this information, you will be able to determine the amount of cash that will be needed for financing the deal and trigger the appropriate fees for financing the transaction.
Once you’ve established the purchase Price range or an exact purchase Price is the time to calculate the value of the transaction. This is done by analyzing the expected returns of non-cash components such as cash and equity as well as debt and tangible and intangible assets. You can calculate these values through your financial models or by using back-of the nap valuations, such as multiples of industry.
The reason why you want to achieve the returns on these non-cash transaction components is because it’s the only way to make a profit from your M&A investment. In the past, this was referred to as ‘economies of scale’, but it can also include cost synergies due to larger operational size, increased distribution capacity, access to new markets, and risk diversification.