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Understanding consideration when you acquire another business

On Behalf of | Apr 5, 2024 | Business Law |

When one business acquires another, consideration plays a key role in the transaction. This involves the exchange of value between the acquiring company and the target company and encompasses various financial, legal and regulatory considerations.

Learning about various aspects of consideration is important before you begin to negotiate an acquisition.

Exchange of value

In its most basic form, consideration involves some sort of transfer of worth between the acquiring entity and the targeted organization. The acquiring company typically offers something of value, such as cash, stock, or a combination of both, in exchange for ownership of the target company.

Determining the consideration

The consideration in a business acquisition involves negotiating between the two parties. Factors such as the financial health of the target company, its market value, and potential synergies with the acquiring company’s operations all play a role in determining the consideration amount.

Types of consideration

Consideration in a business acquisition can take various forms. Cash consideration involves the acquiring company paying a specific amount of money to the shareholders of the target company. Stock consideration involves issuing shares of the acquiring company’s stock to the shareholders of the target company. A combination of the two, or other exchanges such as real estate or intellectual property, may also come into play.

Assessing fairness

Ensuring fairness in the consideration offered is key in a business acquisition. Both parties must feel that they are receiving fair value for their contributions to the transaction. Trusted experts typically play a role in negotiating and assessing the fairness of the consideration offered.

Legal and regulatory considerations

In addition to financial considerations, there are legal and regulatory considerations involved in a business acquisition. These may include antitrust laws such as the Sherman Act, securities regulations, and tax implications. Both parties must comply with these laws and regulations throughout the acquisition process.

Finalizing the transaction

After coming to an agreement and meeting all legal and regulatory requirements, the business acquisition can proceed. The acquiring company takes ownership of the target company, and the transfer of value to the shareholders of the target company takes place.

With a clear understanding of the role consideration plays in business acquisition, you will be better positioned to navigate the process successfully.