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Points to be considered while acquiring a company

Manikanta Raju CA,CWA,(CS) , Last updated: 16 June 2010  

Now a day’s cross border transactions, mergers and acquisitions became quite common in a regular business phenomenon.  In this article I will discuss a few points as a course of initial observations to be considered while acquiring company-

1)      NET WORTH: The first and crucial aspect that is to be considered while acquiring a company is the net worth. The most influential factor regarding the payment of purchase consideration) PC will depends upon the value of net worth of the company.


ü  If the value of net worth is positive, then it will not lead to much discussion in the fixation of PC. Based upon the future economic benefits, large scale of operations and other taxation benefits accruing to the company the payment of PC more than its net worth will depends.

ü  If the net worth of the company is negative then we have to consider the reasonableness and factors satisfying payment of PC to a negative net worth company.

Generally, the reasons will be –

Ø  Synergy benefits after acquiring the company as a whole and new customers accruing to the existing business

Ø  Forecast of Expected future cash flows may be positive or

Ø  The company is in gestation period and will give future economic benefits once it starts its commercial production

In order to know the correctness of financials of the company (Required for calculation of net worth) we can go for a due diligence audit.

2)      Captive Intensive: Generally the service organizations are non-captive incentive contrary for other companies. Because the value of service organizations depends upon the quality of personnel it is hiring. The risk is less in acquiring captive incentive company than the non – captive organizations. The reason is because even though the merger is not successful the purpose for which we have acquired, still we can gain something by selling its assets.

3)      Ratios:  Analysis of the ratios from the financials of the targeted company plays a major for acquisition. The following ratios we can consider like – operating profit ratio, current ratio, absolute liquid ratio, proprietary ratio, solvency ratio, fixed assets-current ratio….. etc.,

Generally there is a belief among many people that current ratio cannot be less than one (Working capital can’t be negative), they feel it is not good for the running a business. But the above view is partially correct, even though current ratio is less than one still we can manage if we have good cash/bank balances

4)      Investments:  If the company is having investment (Whether it may be short term/long term (Trading or not) / Investment property), then we have to go for a fair valuation which will give a clear picture about the group.

Let us say for example ABC Ltd is having investments in its subs DEF Ltd, GHI Ltd, KLM Ltd and NOP Ltd.

In the financials of ABC Ltd (Stand alone), the investments of subs were generally presented at acquisition cost/Historical rate. So, in order to arrive at clear picture we have to go for fair valuation of investments.

The company which is not good individually may performs well at group level, if you are acquiring a company means you also acquiring the group companies in which the targeted company is interested.


5)      While analyzing the PAT of the companies we have to consider whether any extraordinary items were taken into account and its impact on the profit.

6)      The brand value, value added chains, industry profile, financial healthiness and other important points must be taken into account for acquiring a business.


This article is to give a overall view but it is not exclusive in scope, analysis of a entity in financial perceptive have no ends.


Regards……………….!!!!!!!!!!  Manikantaraju CA,CWA,(CS)





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Manikanta Raju CA,CWA,(CS)
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