Guide to M&A Appraisal

A Timelined Guide to M&A Appraisal

M&A deals are a complex multi-stage and multi-factor economic and legal process, which makes them the focus of many risks. Thus, for effective integration, many factors should be analyzed. This article will consider the primary points of the M&A appraisal.

Features of the valuation of M&A of corporations

The main reason for transactions where companies use mergers and acquisitions (M&A) is competition, which forces them to actively look for investment opportunities, use all resources efficiently, reduce costs and look for strategies to counter competitors. In addition, the development of the economy is expressed in its globalization, technological progress, and market liberalization. By expanding their capabilities, companies create diversification and restructuring strategies.

A successful business M&A transaction involves the successive passage of several stages, each of which has a specific goal and ends with a result while adhering to a particular methodology and technology. A clear and unmistakable following of the stages should reduce the risks of unsuccessful completion of the transaction and subsequent severe problems for all participants in the integration.

The fundamental goal of a company formed as a result of the merger of two or more companies is to achieve a synergy effect, which allows you to achieve a higher and more stable position in the market, obtain economic benefits, and open up new prerequisites for development. Therefore, if the costs associated with the merger are inferior to the benefits from its implementation, the transaction is assessed positively and is determined as economically justified.

M&A appraisal may use existing loan or lease agreements, employment contracts, minutes of meetings of the founding board, and other documents that can be studied and analyzed as an information base.

Approaches of business valuation in terms of M&A deals

Depending on the specific situation, business valuation in M&A will have certain features. There are three approaches to M&A appraisal:

  • The income approach to business valuation is based on comparing the investor’s future income with current costs. A comparison of income with prices is carried out, taking time and risk factors into account. The dynamics of the company’s value, determined by the income approach, allow managers and owners to make the right management decisions.
  • The cost (property) approach in business valuation considers the value of the enterprise in terms of the costs incurred. However, the balance sheet value of the assets and liabilities of the enterprise due to inflation, changes in market conditions, and accounting methods used, as a rule, does not correspond to the market value. As a result, the appraiser is faced with adjusting the balance sheet of the enterprise. To do this, the fair market value of each asset on the balance sheet is first assessed separately, then the current value of the liabilities is determined, and finally, the current value of all its liabilities is deducted from the fair market value of the total assets of the enterprise. The result shows the estimated value of the company’s equity capital.
  • The comparative approach is a set of business valuation methods based on a comparison of the enterprise being valued with the sales prices of similar enterprises in general or with the sales prices of shares of similar enterprises. When applying the comparative method, information on mergers and acquisitions of similar enterprises is taken into account. At the same time, the transaction must take place under similar market conditions (specialization of companies, geographical location, and asset structure were identical).