As an M&A practitioner, a critical skill needed to win is the ability to get internal approvals to move forward with the deal.
Corporates, private equity, and venture capital all have some version of a “deal approval” committee that has the final say on whether the deal team can move forward with putting in a non-binding offer, and on giving final approval to close the deal.
Developing this ability to present the business case to the committee is an important skill to master. Here is a framework for how to build this skill.
1) Be clear on the purpose of the business case
A common belief is that the purpose of the business case is just to “sell” the deal internally.
While this may be partly true, I believe that the true purpose is “to help the steering committee to make a thoughtful decision on the investment”.
Sometimes this means that the deal moves forward. Sometimes not. Either way, its important to stay neutral and objective.
2) Establish strategic fit
This step assumes that the organization already has an M&A strategy in place and that the team has pre-determined the criteria before deals are sourced.
Example criteria could include entering a new market, launching or enhancing a strategic capability, cost optimization, or acquiring a customer base.
Anchor your recommendation on the deal to the deal strategy. Clearly explain why this particular deal is being presented, and how well it aligns with the criteria (or not, and if not why not).
3) Justify the deal quantitatively
At the simplest level, this is an analysis of Spend vs. Benefit.
Spend comprises the purchase price for the deal but also transaction costs, effort from the internal teams to diligence and integrate the business or capital expenditure.
Benefit typically can be quantified by the direct incremental cash flows from the business. Other benefits can include cross-selling opportunities and cost synergies.
Both Spend and Benefit are typically captured well in a discounted cash flow analysis.
Each organization also favors specific deal KPIs (e.g. ROI, accretion / dilution) – be sure to express the deal value in those metrics, so that the investment committee can compare deals apples to apples.
Also, show deal comparables (how the deal is priced relative to the market). This is especially important in an environment where the market is frothy, and it’s important to know that the organization is not overpaying for an asset.
4) Demonstrate business commitment
Ensure that the deal has a Business Sponsor who commits to owning the delivery of the Benefits.
And work directly with the sponsor or his / her delegate to quantify all the assumptions underlying the business case.
It’s almost always best to let the Business Sponsor present the deal to the Steering Committee, with the deal team supporting the story with data.
5) Outline Risks and Mitigations
A good business case also plays devil’s advocate, thinks through both strategic and execution risks, and is proactive about addressing these issues.
Ask yourself the question: “Why might the deal not work, and how can we mitigate it?”
Issues that typically come up are both commercial as well as deal / structure related.
Develop sensitivity and scenario analysis to show possible states of the world (change valuation discount rate, growth rates, margins, pricing assumptions) and the impact on the deal.
6) Include a clear Call to Action
This is what we’re asking the Steering Committee to do – e.g. approve a non-binding offer, approve resources to conduct diligence, or even approval to pass on the deal (if it’s been in front of the committee earlier).
It’s good practice to outline the Call to Action in the agenda and at the outset of the meeting so that the committee knows what decision they will be asked to make at the end of the discussion.