Mergers and Acquisitions

Chapter 3. Valuation and Preliminary Agreement

Introduction

After the search and qualification effort has been completed, the next phase of the acquisition process involves the valuation of the target company and, assuming a continued desire to proceed with the transaction, the forging of an agreement on the basic terms of the transaction. The five specific steps in this phase of the process are:

1. Developing a valuation range for the target company

2. Determining acceptable terms of an agreement

3. Establishing internal agreement on terms and negotiating position

4. Negotiating the basic terms of the agreement with the seller

5. Documenting of terms of the agreement in the form of a letter of intent

These steps, preceded by a discussion of the valuation theory and practice and the treatment of synergies, are detailed hereafter.

Valuation Overview

This overview of the valuation theory and practice is not intended to be an in‐depth treatment of what can be a very complex and nuanced topic. It is an overview of the most important and relevant aspects of valuation, as they are applied to acquisitions. There is a vast amount of literature available on virtually every aspect of valuation.¹

Conceptual Framework

Application of valuation concepts can be complex and generally requires a high degree of expertise, experience, and professional judgment. However, conceptually, the valuation of an acquisition candidate is a fairly simple proposition. It entails establishing a range of possible purchase prices, based ...