An acquisition deal is a contract between two parties that defines terms and conditions of a business transaction. In an acquisition, a firm buys another company, taking over its ownership. This can be a friendly or hostile takeover, where the target’s board of directors and employees either agree to or decline the offer. Acquisitions are a key strategy for companies seeking growth. There are several advantages to acquiring an existing company, including reduced integration costs, the ability to use the acquired firm’s brand name and intangible assets, and access to a foreign market.
To successfully complete a transaction, both sides must understand and respect the other’s needs. A good acquisition deal outlines all of the terms and conditions, such as the purchase price, how payment will be made (cash or stock), and any other stipulations. It also contains representations and warranties, which are statements that each party makes about their businesses to ensure transparency. For example, a buyer might warrant that the target company’s assets are free of encumbrances and that its financial statements are accurate.
The acquiring company must carefully evaluate the target company to make sure it is worth the acquisition price. It may value the company based on its current earnings, but it is usually more effective to examine comparable businesses in the same industry to determine a fair value for the target. For example, an acquiring firm might compare the target company’s price-to-earnings ratio to the P/E ratio of its peers.