M&A framework: target value, synergies and price

The M&A framework organises an acquisition decision around four questions: why buy, what the target is worth on its own, what more it is worth once combined with the buyer, and what could go wrong.

It has no single origin. It follows the basic reasoning of corporate finance: an acquisition creates value for the buyer if the price paid is lower than the standalone value of the target plus the value of synergies, net of the cost of getting them.

In interviews, you meet it in two forms. In the first, a company buys a competitor, a supplier or a business in another industry, and synergies are the heart of the matter. In the second, an investment fund looks at a target: there are no synergies, and everything rests on the quality of the business, its growth and the expected resale price. Asking "who is buying, and why?" during clarification saves you from running the wrong version.

The tree has four branches, but they do not weigh the same. The first, the strategic rationale, is settled in a sentence or two. The next two are quantified and added up. The last one subtracts: each integration risk translates into synergies that will not materialise or costs that pile on.

Everything leads to a single comparison: standalone value + synergies - integration costs, against the price.

Here is the prompt. Clinivet, a network of 100 veterinary clinics, wants to buy Vetosud, 30 clinics in the south of the country. Vetosud makes €50M in revenue and €5M in EBITDA. Its owners are asking €60M. The interviewer adds that comparable networks have recently sold for around 8 times EBITDA.

Why buy? Clinivet has no clinic in the south. Opening 30 clinics one by one would take years, because the scarce resource is the vet, not the premises. The rationale holds.

What is Vetosud worth on its own? €5M times 8, which is €40M. The asking price is therefore €20M above that value. The whole question is whether synergies close the gap.

What are the synergies worth? You look for two and ask for the data. Vetosud buys €10M of drugs and supplies a year; on Clinivet's terms it would pay 10% less, which is €1M. Accounting, payroll and IT, once pooled, save another €1M. Total: €2M a year, worth €16M at the same multiple of 8.

What does integration cost? The prompt puts it at €4M, paid once.

Recommendation. At €60M, Clinivet would overpay by €8M and hand the sellers all the synergies it still has to deliver. The deal makes sense up to €52M, and a sensible offer sits below that to keep part of the gain. One argument for going higher remains: Vetosud's margin is 10% while Clinivet's is 15%. Closing that gap would be worth a lot, but it is a bet on execution that should not be paid for upfront. The first risk to deal with is partner vets leaving and taking their clients with them: part of the price can be paid later, on condition that they stay.

The framework breaks when you run it without knowing who is buying. With an investment fund, the "synergies" branch is empty and you waste time filling it while the interviewer waits for you to talk about the target's growth, its debt and its resale.

It also breaks on revenue synergies. Cost synergies can be calculated: you know which contract to renegotiate and which role to cut. Cross-selling assumes that one company's customers will buy the other's products, which nobody can guarantee. A careful candidate mentions it, quantifies it separately and does not base the price on it.

Third limit: the framework compares the deal with nothing at all. The real alternative is often elsewhere: opening your own sites, forming a partnership, buying another target. A deal that creates value can still be a poor choice if another route creates more.

Finally, it suggests that value is a number. It is a range, which depends on assumptions about growth and margin. In an interview, giving a maximum price and saying which assumption it depends on most is better than a single figure presented as certain.

Replace the four headings with the questions of the case. Instead of announcing "strategic rationale, value, synergies, risks", say what you are going to check: "I will first look at what Vetosud is worth on its own, then at what more Clinivet can get out of it, and compare with the €60M asked."

• Start with the buyer's objective. It tells you which synergies to look for and which alternative to compare with.
• Bring everything back to a maximum price. It is the thread that ties each branch to the decision.
• Separate what is certain from what is hoped for. Purchasing savings on one side, cross-selling and margin improvements on the other.
• Name the risk that can wipe out the gain. In a service business, it is almost always the people.

To assess the target on its own, you reuse what you can already do elsewhere: a profit tree for its profitability, a look at its market as in a market entry case. This is the idea behind the FrameLab course: an acquisition case is not a fifth framework to learn, it is an assembly of reasoning you already master. The interview questions give you more prompts to practise on.

A paint manufacturer is considering buying a chain of 200 DIY stores that already carries its products. In two minutes, list the synergies you would look for, then the risk that worries you most.