Financial Considerations of Mergers and Acquisitions
Mergers and acquisitions can be a great way to grow your business, but it’s important to be prepared. In this article, we discuss the financial implications of these types of deals.
Mergers and acquisitions can be complicated, but they are a natural part of the business cycle. Depending on the type of deal and the purpose of the transaction, both mergers and acquisitions can help companies increase their size, reduce competition and reach new markets. However, this strategy may not be a fit for every company and needs to be planned out carefully, as there are definitely downsides and risks if not executed correctly.
While mergers and acquisitions can fast-track growth for a business, the process itself can take a fair amount of time and resources to complete. From how a company is valued to how the deal is financed, there are many moving parts. Let’s take a closer look at financial considerations to keep in mind if you’re considering an acquisition or merger.
The financial effects of mergers and acquisitions
Mergers and acquisitions affect every part of a business, from company morale and operations to public perception. The impact of mergers and acquisitions on financial performance, however, can be profound. Some potential financial benefits of mergers and acquisitions include:
- Boosting profitability
- Reducing costs and increasing operating leverage
- Improving operating margins
- Opportunity to increase stock performance
- Tax benefits
Financing a merger or acquisition
Similar to other types of business deals, how the purchase is made is one of the most important financial aspects of a merger or acquisition. How you finance a deal can have a significant impact on the pro forma financials. Depending on the terms of the deal, mergers and acquisitions can be financed in a number of ways. Generally, it comes down to cash, an exchange of stock or an equity-only transaction. Some mergers or acquisitions involve a combination of these methods. For example, cash and stock may be used in combination to fully finance the transaction.
The exchange of stocks or bonds can further complicate the acquisition process. Stock must be carefully valued to ensure that the acquiring company and target company are swapping shares at a fair ratio.
One of the more straightforward ways to fund a merger or acquisition is through business acquisition financing. Obtaining a loan to complete a cash transaction can simplify the process, limiting the complexities of managing stock, bonds or debt-based transactions. It can also be an effective tool in leveraging your returns on the deal while preserving your equity capital to deploy for other opportunities.
Mergers and acquisitions tax considerations
When companies merge, it can create a variety of tax situations. The transaction might be classified as a tax-free reorganization—also called a corporate reorganization. In a corporate reorganization, no tax is immediately incurred during the acquisition. There are several types of corporate reorganizations, the rules of which are defined in Internal Revenue Code (IRC) Section 268.
The importance of tax planning during mergers and acquisitions
Tax considerations can be vital in determining the structure of a merger or acquisition deal. The structure of the deal—not just the amount of money involved—determines the tax consequences to both parties. Keep in mind that on top of federal tax regulations, there could be state taxes and local guidelines to consider as a part of the transaction.
For more information on mergers and acquisitions tax considerations, consider reaching out to a professional tax advisor. They can help you determine what type of deal could maximize tax benefits for your company.
Tips for streamlining mergers and acquisitions
There are several risks associated with the financial aspects of mergers or acquisitions. If your company does not do its research, you may end up overpaying for the target company. In turn, this may negatively impact stock performance if investors believe that the deal was made too hastily.
It’s important to be prepared before following through with a merger or acquisition. Here are a few steps to consider:
- Create a business expansion plan. A business expansion plan includes details about how you will reach and sustain long-term growth. Part of creating an expansion plan is deciding whether your growth goals would be better met through organic expansion or through mergers and acquisitions.
- Check your company’s financial health. Monitoring certain financial ratios gives you a realistic view of your current financial situation and can make it easier to manage expectations going into a merger or acquisition.
- Establish a merger or acquisition team of professionals. This team should be made up of individuals that understand your industry, your business and what you are hoping to get out of the transaction. This can include your own staff members as well as outside agents, such as a legal counsel or a tax professional.
- Conduct your own valuation of the company you are acquiring. Be sure to do your due diligence when it comes to evaluating the company’s worth, verifying financials and identifying legal considerations. This process does come at a cost, but it is an important step for reducing risk. Business valuations can be performed informally, or through a professional business appraiser.
- Determine the tax implications associated with the merger or acquisition. Tax considerations can impact how the deal itself is structured, so it’s important to understand how your upcoming merger or acquisition adheres to the tax code—and what that might mean for your business. You’ll want to have an experienced and trusted tax professional in your corner throughout the process.
- Find a paying agent you can trust. If you’re looking for a professional paying and exchange agent who can increase transaction efficiency and help you avoid common obstacles, consider partnering with a trusted commercial bank. Many commercial banks have teams who specialize in mergers and acquisitions and are ready to offer support at any time during the process.
Professional banking solutions for your merger or acquisition
No matter how clear your vision is for your company’s future, it’s important to bring in the expertise of professionals that are well-versed in what successful mergers and acquisitions look like. Your team of experts should include a trusted commercial banker that is available to answer questions and provide support.
At Cadence Bank, we offer commercial loans that can be used as immediate financing for acquisitions. We also have a dedicated and experienced escrow team that can act as a paying agent for your transaction.
We strive to simplify the merger and acquisition process through our customized commercial banking solutions. Contact us today to learn more about Cadence Bank could help facilitate your company’s growth.
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.