Insights M&A
How to Evaluate a Potential Acquisition Before Calling the Banker
Before a process begins and costs accumulate, an acquisition can be assessed internally against a small number of questions. Most opportunities that fail later would have failed this assessment at the start.
Begin with the strategic objective
The first question is what the acquisition is for: capability, capacity, market access, a customer relationship, consolidation, or time.
If the objective cannot be stated in a sentence, the acquisition is being driven by availability rather than by strategy. Availability is a poor reason to buy a business.
The internal assessment
- Would building the same capability be slower or more expensive than buying it?
- What does the target depend on, and does that survive a change of ownership?
- How much of the target’s performance rests on individuals who may not stay?
- What integration would actually be required, and does the business have the capacity to do it?
- How would it be funded, and what does that do to the existing capital structure?
- What is the position if the expected benefits take twice as long to arrive?
Distinguish price from value
The price is what is paid for the target as it stands. The value is what the business is worth in the acquirer’s hands, including whatever the acquirer can do with it that the current owner cannot.
Difficulty arises when the acquirer pays for value they expect to create themselves. The benefit of integration should not be handed over in the purchase price.
The discipline of walking away
Setting the walk-away position before negotiation — on price, on structure and on the conditions that must be satisfied — is what makes it possible to hold that position later, when time and cost have already been invested.
Embee works with promoters, boards and management teams across acquisition, sale and strategic transaction processes.
