Acquisition Marketplace Review - The Journal of Applied M & A Theory

— Markets, customers, and revenues.
— Assumed cost savings and operating expenses.
— Demands upon cash and credit capacities.
— Reserves and contingent expenses.
— Planned assimilation or integration costs.
— Anything that materially changes your perception of the overall risk of the investment.

  • Whenever possible, quantify the impact of all findings that relate to valuation and pricing decisions.
  • Negotiate with the seller to mitigate the impact of any findings that materially lower anticipated returns.
  • Adapt your assimilation and integration plans based upon your findings.
  • Don’t “stove-pipe” the findings. Make sure that all of the appropriate people in your organization receive the data and encourage them to carefully evaluate its significance and adjust plans and expectations as needed.

The Art of Valuation and Pricing

Every business buyer should adopt a formal, disciplined and standardized approach to valuing and pricing an acquisition target. Models can be internally developed spreadsheets or can be complete third-party or external systems like MoneySoft’s DealSense® Plus+. The main disadvantage of spreadsheets is that there can be any number of models prepared by different people, which can lead to inconsistent and incomplete results unless a standard is set and tested.

When considering models, forecasts and valuations, keep a few things in mind:

  • Numbers are not the business. Get beyond the numbers. When analyzing historic financial statements, numbers represent the accounting treatment of transactions. Keep in mind that every line item is comprised of many individual transactions.
    Each individual transaction started with an intention, was then implemented, produced a result and was then reported according to the company’s accounting policies and competence.
  • Models can be elegant and simulate the calculated results of a large number of assumptions and variables. When it comes to valuation and pricing, there are a number of key assumptions and variables that can be manipulated with dramatic results. An analyst needs a high degree of intellectual honesty and moral backbone to simulate numbers that are of true value to the organization.
  • Numbers should be used as part of the fact finding, planning and negotiation process and never manipulated to rationalize or justify an otherwise non-sensible price.

An acquisition is a major business event. Each deal presents a set a unique challenges and risks. Some risks can be identified and managed. Some risks can catch a buyer by surprise. These risks and challenges are best faced without the added burden of overpayment.

By adopting a deal philosophy that integrates strategy, negotiating and due diligence along with a disciplined approach to valuation and pricing, a buyer can side-step the overpayment trap.

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