An acquisition deal is a business purchase that brings additional resources and operations to the acquiring company. In many cases, acquisitions are intended to fuel growth by expanding market reach, accessing new technologies or products, or reducing competition. Other times, the goal is to reduce overcapacity or increase efficiency by consolidating and concentrating services and assets.
The key to a successful acquisition is thorough due diligence before the transaction closes. The acquirer must know exactly what they are buying, and the contract should reflect that with precise asset descriptions and liabilities, payment terms, and post-acquisition responsibilities. This level of detail prevents ambiguities and misunderstandings, ensuring a smooth and seamless transition.
As part of the due diligence process, an acquirer should assess the target firm’s debt load to make sure it is manageable. In addition, they should examine the target’s litigation history to ensure there are no issues that could impact post-acquisition financial performance. It is also important to examine the management team and determine if they have a strong incentive to buy companies. An example would be an executive compensation system where the managers are paid based on total profits, rather than profit per share, which can give them a perverse incentive to buy companies to boost their overall profits but lower their profitability.
A merger and acquisition can be structured as an Assets Purchase Agreement (APA) or a Merger. In a purchase of this type, the acquiring company is purchasing only the assets that it needs to complete its goals in the transaction and assumes only those liabilities that are specifically identified.