How to structure an acquisition case.

Suppose a payments company is considering buying a fraud-detection software business. “It is a growing market” is a weak reason to spend the money. A useful reason would be: the payments company loses customers because its fraud tools are poor, and acquiring this software could improve its offer faster than building a replacement.

That explanation gives your analysis a direction. You need to understand the customer losses, whether the software would fix them, how quickly it could be integrated, and whether ownership is necessary. A licensing agreement might deliver much of the benefit with less cost and disruption.

Explain the specific mechanism that creates value. Growth or a stronger market position is an ambition; the acquisition case needs to show how ownership produces the benefit.

Before drawing your structure, clarify three things:

• Who is buying? An operating company, a private-equity firm, and a private-equity portfolio company can have different reasons to buy.
• What does the buyer want to achieve? Establish the commercial objective, return requirement, and relevant deadline.
• What decision are you making today? Recommending further investigation is different from approving the purchase at a stated price.

Ask about information that changes your approach. You can investigate customer demand and operating costs once the analysis begins.

For the payments acquisition, I would use the following structure. The questions work together; the details change with the deal.

You can explain the logic conversationally:

“I would first establish what the software business is worth on its own. Then I would test the extra profit we could earn through our payments customers and whether we can integrate the product without losing customers or key engineers. Finally, I would compare the resulting value with the asking price and the cost of licensing or building.”

Finish with a starting point. If the buyer is paying a large premium because of cross-selling, testing cross-selling comes before a detailed tour of the whole software market. The useful question is whether the proposed benefit can support the premium.

A synergy is an improvement that comes from combining the businesses. Saying that the buyer can “cross-sell, reduce costs, and gain scale” names possibilities. You still need to show how money reaches the business.

For cross-selling, work from eligible customers to additional profit. Imagine 400 payments customers could use the acquired product, 25% would buy it, and annual revenue per new account would be $20,000.

400 eligible customers × 25% conversion × $20,000 = $2 million in annual revenue.

At a 60% contribution margin, that produces $1.2 million before any additional fixed spending needed to support the programme. Deduct that spending, account for the time it takes to win customers, and check whether some of those sales would have happened without the acquisition.

Test the conversion assumption. A payments relationship does not prove the salesperson knows the fraud-software buyer, and the customer may be locked into another contract. Check customer access, selling capacity, skills and incentives before converting the opportunity into revenue.

Cost savings need the same treatment. Combining two offices saves money only when leases can be ended or space reused. Combining engineering teams can reduce payroll while also slowing product development. Explain the net effect.

Here is a separate, simplified acquisition valuation. All amounts are in millions of dollars, and the future benefits and costs have already been converted to present values. That means you can compare them with a purchase price paid today.

The seller is asking for $20m above standalone value. The buyer expects $26m in net additional value, leaving only $6m after paying that premium.

That is a much more useful conclusion than “there are $40m of synergies.” Most of the extra value has already gone into the seller’s price.

Now reduce the cross-selling value from $30m to $18m. The buyer’s value falls to $94m, so paying $100m destroys $6m. The decision depends heavily on the sales forecast. Your next investigation should test that forecast before refining less important assumptions.

Keep the calculation consistent. Do not add one year’s profit to a business valuation. Do not add benefits already included in the standalone forecast. And if the price is an enterprise value, compare it with an enterprise valuation; the cheque paid to shareholders also depends on cash and debt.

“Integration risk” is too broad to guide a decision. Name the failure, the financial effect, and the evidence you would seek.

In the payments example, the target’s lead engineers might leave after the purchase. If that delays integration, customers cannot buy the combined offer on schedule. The risk therefore changes both the timing of cross-selling and the cost of retaining the team.

A useful next step is to examine who maintains the critical parts of the product, discuss retention with those people, and have the technical teams estimate the integration work. “Conduct more due diligence” gives the client much less direction.

Compare the alternatives here too. Licensing could be attractive if it reaches customers sooner and preserves flexibility. Ownership becomes more valuable when the buyer needs control over the product roadmap or capabilities that a contract cannot reliably provide.

A private-equity investor usually needs a clear path from the money it invests to the money it receives during ownership and at exit. Investigate operating improvements, cash generation, debt repayment, and the eventual sale value. Use the case’s investment horizon and return target.

Distinguish a standalone investment from an add-on acquisition. A fund buying a business on its own may have no salesforce to share with it. A fund adding that business to an existing portfolio company may have specific commercial and cost benefits to test.

In Management Consulted’s restaurant-acquisition walkthrough, the conversation moves from attractive restaurant profits to how the investor would earn a return on the purchase. That is a useful question to practise: what would make this business worth more, and what investment would be needed to achieve it?

The private-equity due-diligence guide develops that investor-return calculation.

For the $100m acquisition above, a useful conclusion would be:

“I would hold off on approving the purchase at $100m. Our base case values the business at $106m, but reducing the cross-selling forecast brings that down to $94m. I would first validate demand with the eligible customer accounts and confirm the integration timetable. If that evidence does not support the forecast, we should negotiate a lower price or pursue licensing.”

You have made a decision, explained the economics, and identified the work that could change your view. The confidence comes from knowing which assumption matters.

Use Case Room’s PE Add-On Acquisition structure drill, a roughly five-minute exercise in private equity and business services. Present the target’s standalone economics, the benefits from combining it with the existing business, and the first assumption you would investigate.