Companies acquiring other businesses is a common practice, done frequently. For the entity that is about to be absorbed in one of these deals, there may be many questions about why it’s happening, and what’s coming next. Here are a few key concepts that may help you understand these complex arrangements.

Understanding M&A as a Tactic, Not a Strategy

Mergers and acquisitions are a means to an end, not the endgame itself. Put another way, a company that acquires another is doing so to achieve a bigger picture goal. Employees of companies that are being acquired will do well to remember that they are being purchased to perform a specific function.

The Two Main Driving Forces

Mergers and acquisitions almost always happen for one of the two following reasons: first, the company that is being acquired has something that fills a hole in the acquiring group’s strategy. In other words, it provides something they need. The second reason is expansion. In these situations, the company making the acquisition wants to get into a new market or tap into a different revenue stream from what they currently have.

Everything Adds up to Value

When a company starts entertaining the notion of another, one of the key elements of due diligence is to add up the potentially-acquired business’ value. This is comprised of much more than just physical assets or revenue. It also includes its staff (and their expertise), intellectual property, and brand equity. All these things are assigned a dollar value that is factored into the acquirer’s offering.

The Finance Formula

Speaking of value, one of the cornerstones of assessing whether mergers and acquisitions make sense is using “base” and “acquisition” case formulas to determine financial viability. The base formula puts revenue against the market stabilization scheme against net income for both companies separately. The acquisition case puts revenue against the market stabilization scheme against net income upside after the costs associated with the M&A.

Never Forget the Odds

It’s often overlooked that mergers and acquisitions are inherently risky endeavors. Over half of them fail for a variety of reasons, including the difficulty of determining an accurate market value, attrition and redundancy of staff, and the challenge of integrating work cultures and values.

If your company is being acquired, keep this roadmap in mind. That doesn’t mean that your transition will be inherently bad, but you must be prepared for changes, and ready to roll with the punches.