A business case is an argument that justifies a particular course of action to an executive or decision-maker. If you want to make sure your merger or acquisition has the best chance at success, make sure you’ve prepared the right type of business case! A poorly constructed business case can lead to inadequate justification, improper prioritization, erroneous forecasts and predictions, as well as a disparate impact on company culture.
According to Fintalent’s business case consultants, the type of business case that a firm requires will be determined by two main factors: the size and the industry the firm plays in. In order to get a good idea of which type of business case is need, first determine if it is an M&A-focused executive or one that works in operations (such as strategy or marketing). If the primary role is M&A, then it is likely that the business case will be focused on the financial impact of the deal and set out to calculate how much revenue is to be acquired.
If one is not a merger/acquisition specialist (i.e. you deal with strategy, operations, etc.), then the business case will be more focused on the non-financial aspects of your deal. If you’re not sure whether your business case is similar to a financial forecast or a strategic assessment, use this Business Case Matrix to help you figure it out.
Types of Business Cases
There are four main types of business cases. The first two cases are based on financial forecasts and set out to calculate how much revenue is to be acquired, or how much funding is required. The other two types of business cases focus on strategic assessment and look at the overall impact that your acquisition or merger will have on your organization (i.e., culture).
The first type of business case is a financial one. This is an analysis that covers the revenues, income, cash flows, costs and profits involved in your deal.
The second type of business case is an operating model one. This covers the operating structure of your deal and how you will integrate your two organizations.
The third type is a M&A case. This looks at how your deal will impact the growth of the acquiring company and its shareholders. If you’re an investor or analyst, this type of business case would be more relevant to you than a financial forecast or operational assessment (which are extremely complicated!).
The last type of business case is an organization assessment one. This looks at the human, financial and informational impacts of your deal and how it will affect your company culture. This type of business case focuses on what you are acquiring (i.e., talent, intellectual property, etc.) as opposed to what you’re acquiring (i.e., product lines, market share, etc.).
Steps in Preparing a Business Case for an M&A Deal
M&A deals are complex and require rigorous analysis. In order to ensure that you’re not missing anything or that you’re making the most of your analysis, make sure you follow these steps:
Step 1: Do a thorough risk assessment. You need to understand which risks are associated with your deal, as well as how big these risks are and how severe they will be if they come to pass. Only once you have completed a thorough risk assessment can you then begin to work out the financial side of your transaction.
Step 2: Do a thorough competitive assessment. You will want to understand the competitive landscape in your industry, as well as any potential threats that are associated with your deal. An assessment of your competitors can help you decide how much you will need to spend to acquire the target company.
Step 3: Map out the financials. It is important to understand exactly how much you will be acquiring from your target company and what it is worth. You also want to make sure that you are not overpaying for something that is not worth its value or underpaying for something that would have been extremely valuable.
Step 4: Do a thorough financial analysis. There is no point in continuing to work on the financials if you have not done an adequate competitive assessment or if you have not done a thorough competitive analysis. These pieces are necessary for the financials to make sense and are needed to inform your decision-making.
Step 5: Make sure that you clearly communicate your decision, rationale and conclusion. An M&A deal can be daunting, so it is important that you’re able to justify your choices and decisions so that others can quickly understand them – both insiders and outsiders (i.e., investors or analysts).
In addition to knowing how to carry out a thorough financial analysis and provide detailed information, it is also important that you have accurate information on the industry and deal. If you are working on an M&A deal that involves a technology company, for example, make sure you have up-to-date information about the company’s product lines and company culture.
