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    How I Evaluate an Acquisition Target Before Getting Excited About the Deal

    A man stands above a business gathering, illustrating the discipline of evaluating downside risk before focusing on an acquisition's upside.

    Deals are exciting. That is exactly why I try to slow the thinking down at the beginning.

    Before valuation models and term sheets, I want to understand the strategic thesis.

    Why this company? Why now? Why us?

    Then I start pulling the target apart.

    What are we actually buying? Revenue? Customers? Technology? IP? People? Distribution? A licence? Physical assets? A strategic position? Which of those creates the value and how durable is it?

    I want to understand revenue quality, customer concentration, margins, recurring versus transactional revenue, working-capital requirements, liabilities and the amount of investment the business will need after closing.

    I pay particular attention to people. If much of the target's value walks out the door with three executives, then retention is part of the transaction economics.

    Then there is fit. Can our organization actually absorb this company? Are systems compatible? Are cultures fundamentally opposed? Do the customers make sense together? Does management have enough bandwidth to integrate the business while still running the existing one?

    Build the downside case before the upside case

    Most acquisition pitches are built around what goes right.

    I want to know what happens if the synergies take twice as long, one major customer leaves, integration costs more than expected or the market turns.

    Can the company still carry the transaction?

    That downside exercise often changes the structure of the deal. Earn-outs, staged payments, holdbacks or other mechanisms can align price with what actually happens after closing.

    The full strategic context is in Mergers & Acquisitions: A Strategic Tool. The point of diligence is not to talk yourself out of a transaction. It is to know what you are actually betting on before you make it.

    Chad McMillan, creative entrepreneur and strategic advisor
    Chad McMillan

    Chad McMillan is a creative entrepreneur and strategic advisor with over 20 years of experience in and around the capital markets, focused on finding hidden potential in companies, ideas, markets and people, and advancing what they can become.

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