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Synergies in themselves are too often given as the reason for an acquisition, when they should be just one of several factors. It’s just that they’re not the silver bullet that many managers at acquiring firms believe them to be. When considering the above information and/or valuation report, it is important, as previously suggested, to view the determined appropriate price as a limit, versus a starting point this creates a powerful shift in mindset that results in paying the appropriate amount for a target.įinally, it should go without saying, but checking your ego at the door is key when determining appropriate deal pricing - egos often run high during deals or when battling over a target, which can sabotage wise economic decisions concerning deals 2. More specifically, collecting information such as tax returns, key financials for the last three to five years, an overview of the target’s organizational structure and number of employees, and shareholder agreements tends to be most beneficial. Next, producing a comprehensive valuation report is wise whether your company completes its own valuation or hires someone else to complete it.Įither way, collecting key business information related to the target yields a more realistic and appropriate price point.
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How to avoid overpaying for the target company:įirst, focusing on your company’s overall strategy and overarching goals behind the deal is essential in building a foundation based on avoiding overpayment. This points to the root problem of poor valuation practices since there are many companies who have recently overpaid when purchasing other companies.
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With these staggering stats in mind, overpaying for a company is clearly one of the major M&A risk factors of our time. This is an especially scary fact given Forbes, as well as other similar studies, notes that most “acquisitions fail to create value for shareholders between 70-90% of the time.”
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M&A Risk 1: Overpaying for the target companyĪccording to Forbes, overpaying for a company destroys shareholder value. Let's take a look at M&A transaction risks and how to mitigate each of them 1.