Operational and financial synergy is critical but cultural synergy is paramount

1 Perform integrated due diligence: Using historical performance, deep dive to identify growth and Ebidta improvement opportunities and assess how the business will perform in an uncertain environment. Integrate various components of due diligence including financial, tax, commercial and operations to get a comprehensive view of the target business and to forecast conservative five-year future performance.

2 Assess business impact: Be wary of the target business having too much debt which could increase your overall cost of borrowing. Look for unabsorbed depreciation or accumulated loss which you could set-off in the future. If the target business is stressed but is a ‘cheap buy’, consider having a financial partner to reduce your overall risk.

3 Gauge cultural synergy: Perform a culture assessment to determine if you can transition your culture to the acquired organisation. Via channel checks, figure out if senior employees of the target business are enthused about your company being a potential acquirer.

4 Stay flexible but don’t overpay: Assess historical Ebidta by removing one-off transactions to calculate sustainable earnings. Use discounted cash flow and comparable companies/ transactions model for your valuation range. If there is a mismatch between the seller’s expectation and your offer, consider an earnout structure, where you can pay the bridge-in valuation as the business performs.

5 Protect your downside: Sift through related-party transactions, contingent liabilities and any risk of reputational damage. Ask for indemnities and representations. For critical matters that can significantly impact future profitability, consider asking for fundamental warranties that legally allow you to claim the entire amount paid to the seller.