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Financial Synergy

Definition - What does Financial Synergy mean?

Financial synergy is when the combination of two firms together results in greater value than if they were to operate separately. Financial synergies are most often evaluated in the context of mergers and acquisitions. These type of synergies relate to improvement in the financial metric of a combined business such as revenue, debt capacity, cost of capital, profitability, etc.

Synergies related to operational metrics are referred to as operating synergies.

Divestopedia explains Financial Synergy

Examples of positive financial synergies include:

  • Increased revenues through a larger customer base
  • Lower costs through streamlined operations
  • Talent and technology harmonies

In addition, financial synergies can result in the following benefits post acquisition:

  • Increased debt capacity
  • Greater cash flows
  • Lower Cost of Capital
  • Tax Benefits
When evaluating a merger or acquisition, the positive synergies usually produce a successful result. While financial synergies are often used with a positive connotation, these synergies can also be negative in some situations. For instance, an acquiring company may have to incur additional costs in the target company to bolster the management team or implement systems to meet the standards of the acquirer.

Although financial synergies are usually experienced by strategic buyers, a financial buyer may be willing to pay a premium for the acquisition of a mid-market business due to the benefits associated with a more efficient capital structure and lower cost of financing.

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Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.