A 10 step process

A typical business combination process includes the following steps:

Develop a combination strategy

The key to developing a good combination strategy is for the lead firm to have a clear idea of what it expects to gain from the deal-what its goal is in combining with a target firm (for example, to expand its product lines or enter new markets).

Define target search criteria

Determine key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base).

Search for potential acquisition targets

The acquirer uses its identified search criteria to search for and evaluate potential target companies.

Begin merger planning

The lead firm contacts one or more companies that meet its search criteria and appear to offer good value; the purpose of the initial conversations is to obtain more information and to see how suitable the target company is for a combination.

Conduct a diagnostic and assessment

Assuming the initial contact and conversations go well, the lead firm asks the target company to provide substantial information (current financials, etc.) that will allow it to further evaluate the target, both as a stand-alone company and as a suitable target for a combination.

Negotiations

After having produced several valuation models of the target company, the lead firm must have sufficient information to enable it to construct a reasonable offer. Once the initial offer is presented, both companies can negotiate the terms in more detail.

Due diligence Audit

Due diligence is a comprehensive process that begins once the offer has been accepted; due diligence aims to confirm or correct the sponsor’s assessment of the target company’s value by conducting a detailed review and analysis of all aspects of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc.

Purchase and Sale Agreement

Assuming the due diligence is completed without any major issues or concerns, the next step is to execute a final sales agreement; the parties make a final decision on the type of purchase agreement, whether it is an asset purchase or a stock purchase.

Acquisition Financing Strategy

The acquirer will, of course, have explored financing options for the transaction earlier, but the details of the financing are usually put together after the final memorandum is signed.

Closing and integration of the acquisition

The memorandum and schedules are completed and the management teams of the target and the sponsor work together on the combination process.