Mergers and Acquisitions: A Guide for Businesses Before a Deal

Mergers and Acquisitions: What Businesses Should Consider Before a Deal

A merger or acquisition can help a business enter new markets, acquire new capabilities, expand its customer base or create an opportunity for its owners to exit. But a deal that looks attractive on paper may come with financial, operational or legal complications that are not immediately obvious.

Before committing to a transaction, businesses need to understand what they are buying, what the deal will cost and whether it supports their long-term objectives.

1. Start With a Clear Business Objective

Every transaction should have a clear purpose. Is the goal to expand into a new market, acquire a competitor, strengthen operations or gain access to new technology?

Understanding the objective helps determine whether the proposed deal is worth pursuing. For instance, acquiring a company may offer faster market access than building a presence from scratch. However, if the target’s customers are unlikely to remain after the acquisition, the expected benefits could be overstated.

Businesses should identify what they want to achieve and how they will measure success before negotiations progress too far.

2. Understand the Company’s Financial Position

A company’s revenue and reported profit do not tell the whole story. Buyers need to examine its cash flow, existing debt, tax obligations, outstanding liabilities and the quality of its financial records.

A business may appear profitable but struggle to collect payments from customers or meet its immediate obligations. These issues can create additional funding needs after the acquisition.

Reviewing financial statements alongside contracts, outstanding disputes and other commitments helps buyers understand the company’s actual position before making a decision.

3. Get the Valuation Right

Agreeing on a price is often one of the most challenging parts of an M&A transaction.

Sellers may focus on the company’s growth potential and market position, while buyers consider its earnings, risks, assets and expected future cash flows. These perspectives can lead to very different valuations.

Depending on the business, valuation may involve analysing projected cash flows, comparing similar companies or transactions, or assessing the value of its assets.

The assumptions behind the figures matter. If the projected growth depends on customers the business has not secured or savings that have not been properly assessed, the buyer should be cautious about paying for benefits that may never materialise.

A sound valuation gives both parties a more informed basis for negotiation.

4. Carry Out Proper Due Diligence

Due diligence allows buyers to verify the information provided by the seller and identify potential risks before completing the deal.

Beyond financial records, the review may cover legal obligations, tax matters, operations, employees, major customers, suppliers and regulatory compliance.

For example, a company that depends heavily on two or three major customers may face significant challenges if one leaves after the acquisition.

The findings may influence the purchase price, the terms of the agreement or the decision to proceed. In some cases, the risks uncovered may make walking away the more sensible option.

5. Look Beyond the Purchase Price

The agreed price is only part of the total cost of an acquisition. Buyers may also need to account for transaction fees, financing costs, debt repayments, system integration and additional investment in the business.

The funding structure matters too. Debt creates repayment obligations, while raising equity may dilute existing shareholders’ ownership.

Before proceeding, the buyer should assess whether the combined business can support these costs without putting unnecessary pressure on its cash flow.

6. Plan for What Happens After the Deal

Completing the transaction does not automatically deliver the expected benefits.

The businesses may have different systems, management practices and workplace cultures. Employees may be uncertain about their roles, while customers may have concerns about changes to service or pricing.

A practical integration plan should identify responsibilities, priorities and timelines. If the deal is expected to reduce costs or increase revenue, management should also establish how those benefits will be tracked.

7. Understand the Regulatory Requirements

Depending on the transaction, businesses may need shareholder approvals, regulatory notifications or other formal clearances. Nigerian M&A transactions may involve the Securities and Exchange Commission or other relevant regulators, depending on the companies and circumstances.

Identifying these requirements early can help prevent avoidable delays and additional costs. Businesses should obtain appropriate legal and financial advice before finalising the transaction.

The End2End Perspective

A successful merger or acquisition requires more than agreeing on a price. It requires a clear objective, realistic valuation, thorough due diligence and a plan for managing the combined business.

For buyers, preparation helps reveal risks before they become costly problems. For sellers, understanding the company’s value and preparing its records can strengthen their position during negotiations.

At End2End Advisory, we understand the importance of informed financial decisions throughout a transaction.

Considering a merger, acquisition or business exit? Speak with End2End Advisory before making your next move.