M&A: A Practical Guide to Doing the Deal, 2nd Edition

CHAPTER 10 Sizing Up the M&A Target from a Financial Point of View

Chapter 10 explains how a buyer sizes up a possible acquisition from a financial point of view. It shows how to prepare a historical financial analysis that looks at the target’s track record in depth.

The would-be buyer has narrowed its choices to a few prospects, and it has considered the principal risks of a deal. The next step is defining the relative contribution of each potential acquisition to the buyer’s future earnings and cash flows, assuming appropriate purchase prices. This process begins with an understanding of the historical performance of the target company. From this analysis, the buyer creates a knowledge base from which to project a prospective acquisition’s operating results with some confidence.

The experienced buyer defers making definitive projections until it meets with the seller’s management and reviews its business. Face-to-face meetings answer many questions about the factors influencing sales and earnings. The substance of these conversations focus heavily on the seller’s historical results, since 95 percent of all projections are based on assumptions tied directly to past experience. This is why historical financial analysis is a critical part of the up-front effort. As the would-be buyer understands the drivers behind the seller’s recent performance, the groundwork is laid for an appreciation of the target’s future prospects from a financial point of view.

A buyer’s investigation ...