What the Numbers Decide in an Acquisition
Most acquisitions that go wrong did not go wrong at the price. They went wrong because the buyer modeled the business they were shown rather than the business they were buying, and found out afterward.
Three pieces of work sit between those two things. None of them is paperwork.
The Model Exists to Answer One Question
A deal model is not a forecast of the next five years. Nobody believes year four. It is a test of a single question: after the purchase is paid for, does this business still generate enough cash to service the debt and keep running in a bad quarter?
Everything else in the model is scaffolding for that line. Build the cash flow of the combined business, subtract debt service, and then take the result apart:
- What happens at eighty percent of projected revenue? If the answer is
that debt service still clears, you have a deal with room in it. If it does not, you have a deal that requires everything to go right.
- Which costs actually disappear on day one, and which take a year? Savings
that require a lease to expire, a contract to end, or somebody to leave are real and they are not immediate.
- What is the seller's salary doing in these numbers? Often the largest
single adjustment in a small-company deal, and it is a judgment call rather than a fact.
Synergy is the word for the savings and the added revenue a combination is expected to produce. Treat the cost side as a plan with dates on it and the revenue side as an upside you did not pay for. Buyers who pay for revenue synergy in the price are buying their own optimism.
Diligence Is Looking for One Thing
Diligence has a long checklist and a short purpose: find the gap between the business as described and the business as it is.
The categories are the familiar ones. Financial diligence tests whether the earnings are real and repeatable, which usually means examining the adjustments rather than the statements. Legal diligence looks at what the company is committed to and what it owns, including contracts that a change of ownership can terminate. Operational diligence asks what the business depends on: a supplier, a system, a customer, or a person.
The last one is the one that hurts. If a meaningful share of revenue is held by relationships that belong to the seller personally, you are buying a smaller business than the statements describe. That question belongs in the first conversation, not the fourth. Preparing a business for sale is the mirror image of this, and reading it from the seller's side tells you where to look.
Integration Is Decided Before You Sign
Integration is where deals succeed or fail, and it is the part most buyers start thinking about after closing. By then the decisions have already been made by default.
Three questions settle before signing. Who runs this on day one, by name. What stays separate, permanently, rather than being merged because merging is what you do. And what the first ninety days actually change for a customer, which should usually be nothing. The integration work itself is its own subject and it deserves more room than a section.
Culture is the word that gets used for all of this, and it is not wrong, but it is too soft to plan with. What people mean by cultural integration is that two sets of habits now share a company, and nobody said which habits win.
The Takeaway
Model the downside rather than the plan. Use diligence to find the difference between the story and the business. Decide who runs it before you own it. Deals that survive contact with reality are usually the ones where all three were done while there was still an option to walk away. The basics of how a merger or acquisition is structured are worth having straight before any of it.