How are transaction fees and financing fees calculated in an M&A deal?
Transaction fees are usually based off of a percentage of the total transaction value, usually around 2.0 to 2.5%. This is paid as a one-time fee and is displayed in the income statement after operating income. Financing fees are usually based off of a percentage of the total amount of debt, usually around 2.0 to […]
What are the biggest risks in an M&A deal?
Here are some key risks in an M&A deal:
What are earnouts in M&A deals and why are they important?
An earnout is an agreed-upon payment to management for achieving a certain goal as part of an M&A deal, which is outlined as part of the M&A agreement. For example, an earnout could stipulate that management needs to achieve a 10% growth in gross profit in the next year in order to receive an earnout […]
What are the most important terms of an M&A agreement?
The most important terms of an M&A agreement are:
Are revenue synergies or cost synergies easier to predict?
You have to adjust for the following items in the pro forma income statement: Keep in mind these adjustments are made pre-tax on the income statement, and then a tax rate is applied to see the after-tax effect.
How do you adjust the balance sheet in an M&A deal?
First, if cash was used to acquire the target, we should remove that cash from the combined balance sheet. Then we should remove any existing shareholder’s equity out of the target’s balance sheet. If the acquiror issued new stock to acquire the target, then we should add the equity raised to the shareholder’s equity in […]
Which types of debt have a fixed interest rate and which types of debt have a floating interest rate?
Senior debt typically has a floating interest rate. Types of senior debt include revolver and term loan. A floating rate means the interest rate is is based off of a benchmark rate (such as 1-month SOFR) plus a spread of usually 400-500 bps (4-5%). Junior debt typically has a fixed interest rate. This means the […]
How do you value NOLs in an M&A deal?
An NOL (net operating loss) happens if a company loses money one year. In most jurisdictions, the company can spread this loss around to reduce their taxable income in future years and therefore reduce their taxes. There are usually restrictions on how many years you can go back when calculating your NOLs and how many […]
Walk me through how you would calculate cost synergies.
Cost synergies often involve reducing or eliminating a specific cost. For example, the combined company will not need two headquarters, so eliminating a headquarters is one source of cost savings. This might involve saving costs on salaries and rent. Cost synergies can also come from having more bargaining power. Being a larger company allows you […]
Walk me through how you would calculate revenue synergies.
First, we should understand the revenue model. For example, it could be a quantity x price model, subscribers x ARPU model, etc. If the revenue synergies come from increasing one of these variables in the revenue model, such as an increase in subscribers as a result of cross-selling, then we should estimate how many more […]
