New on FinoLib · Volume II: Capital Markets
I have just published a new article on FinoLib, my free finance education library: How an Acquisition Works: Bids, Diligence and Closing. It is part of Volume II: Capital Markets. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
The idea in plain words
Buying shares of a company is easy; buying the whole company is a negotiated process. Buyer and seller sign a confidentiality agreement, bids come in, the buyer checks the books in diligence, and a purchase agreement spells out who bears which risks. Then regulators approve and the deal closes. The price is often split into cash at closing and later payments that depend on results, called earn-outs. Their real value is the chance-weighted value in today’s money, not the headline number.
Key points
■A control premium is paid because only control delivers the cash flows and the decisions (Part 1.8: Precedent Transaction Analysis).
■US deals above $133.9 million (2026) need a Hart-Scott-Rodino filing if the parties also pass the size-of-person test (automatic above $535.5 million) and usually a 30-day wait; tender offers stay open at least 20 business days.
■An earn-out paying $0, $40 million or $80 million in two years, with 50/30/20% odds, is worth $23.1 million today at 10%, not $80 million.
■Under ASC 805 an earn-out is remeasured every period through earnings, so success can produce a reported loss.
A closer look
When you buy a share on an exchange, you are buying a tiny, liquid, minority sliver of a company at whatever price the market happens to be quoting that second. An M&A transaction is a different animal entirely: one party is buying an entire company, or a controlling stake in one, in a privately negotiated deal that can take months to close and that fundamentally changes who controls the target’s strategy, management, and cash flows. Every valuation tool from Part 1: Corporate Finance & Valuation — DCF, comps, precedent transactions — is used in an M&A deal, but now in service of a single negotiated number rather than a constantly repricing public quote.
A worked example
Worked Example — Bridging a Price Gap With an Earn-Out
A seller wants $500 million, arguing Year-2 EBITDA will reach $60 million. The buyer believes $50 million and offers $420 million. They settle on $420 million at closing plus an earn-out: a contingent payment of $8 for every $1 of Year-2 EBITDA above $50 million, capped at $80 million. The buyer’s probabilities: EBITDA of $50 million (50%), $55 million (30%), $60 million (20%), paying $0, $40 million and $80 million. Expected payment = 0.5 × 0 + 0.3 × 40 + 0.2 × 80 = $28.0 million. Discounted two years at 10%: 28.0 ÷ 1.10² = $23.1 million. The economic price is therefore 420 + 23.1 = $443.1 million, not the $500 million headline.
Under the hood
Under the Hood: How a Deal Actually Runs, and Why Each Step Exists
A sell-side auction for a private company runs in stages, and each stage exists to control a specific risk. A nondisclosure agreement comes first, because the seller is about to hand competitors its numbers. A short teaser and then a confidential information memorandum go to a long list of potential buyers; non-binding indications of interest (a price range) narrow the field to a handful, who get management meetings and a virtual data room for due diligence. The survivors submit marked-up purchase agreements with binding bids, and the winner signs a share or asset purchase agreement.
Decision rule
If buyer and seller disagree about a forecast of a metric that can be measured within one to three years, bridge the gap with an earn-out sized to the disagreement, and value it at its probability-weighted present value, never its cap. If they disagree about a risk (a lawsuit, a tax audit, an environmental cleanup), use an escrow or an indemnity instead.
The costliest mistake
Treating the headline price as the price. In the example above, the seller who announces a “$500 million sale” has an expected $443.1 million, a $56.9 million gap, and the buyer now controls the budget, staffing and accounting that decide whether the earn-out pays. Sellers who take an earn-out should negotiate the definition of EBITDA, operating covenants for the earn-out period and an acceleration clause on a resale; buyers should model the remeasurement charge before promising analysts a clean year.
Recap
An acquisition buys control through a staged process in which the purchase agreement allocates risk and regulators set the closing clock: an HSR filing above $133.9 million in 2026 when the parties also meet the size-of-person test and at least 20 business days for a tender offer.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, How an Acquisition Works: Bids, Diligence and Closing, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance