Making an acquistion - where to pitch your offer

Where to pitch an offer for an acquisition target

You’ve found an acquisition, after approaching a business you knew, through a buy-side broker or by working with an M&A adviser to do a search. You think it’s worth a closer look, but does it fit with your business and strategy? And if so where to pitch your opening offer?

Initial qualification

Is it a strategic fit? Without a sound rationale your acquisition may disappoint. And you must also have a good idea of how you’ll integrate post-acquisition.

Making an indicative offer

If the target gets through your initial qualification process you’ll need to make an indicative offer to buy it. How do you go about pitching it?

First do some financial analysis, not just of the history but also your view of prospects, and how the target will work in your company. There are then three questions to ask – which will give you three numbers to consider in pitching your offer.

  1. What is the going rate for this type of business?
    Your M&A adviser can help assess this based on market evidence from other companies and transactions, and perhaps the target’s forecasts.

  2. What might the vendor accept?
    Can you get any intelligence to help you to understand the seller’s negotiating position? What about their age, health, family circumstances and does the company need cash or other inputs to progress?  Also, is there competition to buy it - there will be if we’re advising the vendor! Remember that sometimes the vendor’s best realistic alternative may be quite unattractive – for example they may have an onerous lease that they’re guaranteeing personally and would be happy to sell cheaply to anyone that could get them out of that commitment.

  3. What’s your maximum price?
    What’s it worth to you? This will be driven by how target might fit into your business. Particularly its cash flow needs. Can you grow it easily - for example by pushing its products out to markets and customers where you have better access? Will it require capital investment? Do you expect to lose some of the target revenue once you’ve assimilated it? Also will adding the target to your business enhance the overall value of the combined entity upon exit? If it’s worth more to you than the “going rate” - anything above is your strategic premium. Of course the key to the negotiation is keeping as much of that premium value to yourself!

Vendor finance

Having decided your negotiating range you should also consider how much cash to offer and how much the vendor might fund via an earnout, or deferred payment. Cash speaks louder than anything else, and is the focus of the vast majority of vendors, but there is often a trade-off between maximum consideration and how much is vendor-funded.

Vendor finance in deals is not uncommon, especially if there’s some uncertainty, the vendor is key and a good handover vital, or if the target has been priced on a growth story. As the buyer it’s all about mitigating risk, and of course getting the target cash flow to part fund the deal.

Vendor conditioning

So you need to decide your negotiating range, and how much cash to include in the mix. Also bear in mind that many vendors of private companies have an outrageously rosy view on the value of the business.

Some need “vendor conditioning” - time for the economic reality of what their business is worth to sink in.  So if you don’t strike a deal first time, withdraw gracefully as you might do the deal at a later date.  


Lake Falconer

Corporate Finance Partner
Lake leads the PEM Corporate Finance team on MBO, acquisition, disposal, succession and strategic planning. He also heads up PEM’s valuation team providing business valuations for shareholder exits, disputes, business planning and regulation. Lake has over 30 years' senior level experience as a business adviser and as a manager in industry. He holds the ICAEW corporate finance qualification.

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