Validate your mergers & acquisitions correctly

Do you remember situations in your company when organic growth was not good enough anymore? Most probably you had discussions about acquiring another company. This is not something one is doing every day. There are strategic discussions needed about what kind of company to buy (competitor, supplier, customer, complementary company).

What are the risks and chances that are associated with these scenarios? What are potential candidates? Are there legal, ecological, social, and governance risks? Can these risks be mitigated?

Finally, what is the value of these potential candidates? Can we effort it? Do we need a debt financing? Do we have financing partners? What is the cost of borrowing? Can we influence the interest rates?

In other words, a full due diligence process is needed. First part of looking for potential candidates, which fit our company’s culture and strategy, is the most interesting one. These are discussions with sales and marketing leaders. If it comes to what these companies are worth, and what we are willing to pay, as well as if the funds are available, is another topic. Usually the financial officer, treasurer, and risk manager are getting involved at this stage.

What we need from a financial perspective is a going-concern-value calculation of the potential candidates. The analysis should be built upon liquidity, profitability, and financial leverage. Based on these measures we are able to derive the value of these companies. Having this analysis on hand, enables us to setup meetings with our bank to discuss financing possibilities. A well educated and certified credit risk management process helps to show that we are risk conscious, and able to mitigate risk. We should use this credit risk process to reflect our own company’s performance too. This helps receiving the funds, and even to a lower interest rate.

Emerald Rating is an award-winning FinTech company providing credit management scoring services through a robo-advisor to mitigate credit risk. In turn this robo-advisor compiles the going-concern-value of companies that are reviewed.

 

Author: Danny Kaltenborn, Date: February 1, 2020

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