Mergers, acquisitions and valuation: deal breakers and how to avoid them

If acquisition or merger transactions are not adequately supervised, they can end up in negative scenarios for the companies involved.

Regardless of your position in the deal, as the seller or as the buyer, different aspects must be taken into consideration in order to carry out a successful negotiation that is focused on achieving good long-term results.

Decisive elements like these help us to find out if there is compatibility between the parties in a merger or acquisition. They are known as deal breakers and below are examples that you should consider in your future transactions:

  • Financial composition at risk – It occurs when the purchasing company realizes that, going forward, it will not be able to mitigate the risks that may be generated. For example, if the purchasing company undergoes a decrease in profitability, based on a forecast that indicates a potential loss of customers.
  • EBITDA analysis – Defined as earnings before taxes, depreciation, amortization, and interest. This is how you measure the company's ability to generate cash flow, which allows us to get a better sense of its profitability. In addition, it is one of the key indicators that signal the evolution of a business. However, a negative EBITDA does not in itself constitute a deal breaker, it depends on the industry.
  • High net debt – Validate that the capital structure (debt to equity) is adequate. Therefore, one of the fundamental tasks during the due diligence stage involves validating the current composition of the debt and identifying other potential impacts that could lead to a larger net debt. This not only causes changes in the future outlook, but also in the price of the transaction, which may decrease.

These deal breakers are important for the buyer during the negotiation and to detect the risks of a merger or acquisition. They are also important for the seller because it allows them to evaluate whether there are opportunities for improvement that could increase the value of the company from the sell-side.

Through an adequate valuation and a due diligence process, it is possible to validate and mitigate potential deal breakers, and also to verify the historical and projected financial standing of the company, for consistent decision making, in line with the buyer's investment strategies (buy-side).

The valuation allows us to learn what is the real value of a company (fair-value) and the due diligence helps us to guard the interests of the seller or the buyer, depending on the case, because it gives us an overview of the risks and financial advantages over our Target. In addition, we can also learn what are the synergies between the companies and the advantages that can be taken of a merger or acquisition.

Some examples are access to new sales channels, strengthening the supply chain, improving capacity management, acquiring key product lines and personnel; as well as eliminating competition.

At Mazars, we can provide these services from both sides of the transaction: the buy-side or the sell-side.