Incremental value process in mergers and acquisitions

Demystifying Valuation, Economic Damages + Forensic Accounting

incremental value process, business, mergers and acquisitionsAre you in the market to merge or acquire another company? Identifying four elements before the deal is complete can help make it a win-win for both parties.

There are a handful of the problems that often arise in the mergers and acquisitions (“M&A”) process.

  • To begin with, buyers tend to be overexuberant about the possible outcomes of the new entity and model theoretical outcomes instead of modeling the most achievable outcomes.
  • Next, buyers tend to rely on the seller too much to provide key information that only promotes positive results.
  • Lastly, another issue is that small and medium-sized entities (“SME”) usually do not have dedicated acquisition teams assigned to the M&A process like larger companies are able to do. This usually leads to a limited amount of due diligence and understanding of the value drivers of the deal.

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So, what is the fix? Start with identifying an employee to lead the ‘incremental value’ process. The incremental value process is the process of identifying value drivers and categorizing them into one of the following buckets to avoid overenthusiastic forecasts:

  1. Products and Services – expanding and improving the products and services the buyer and seller in the M&A process offer to the consumer
  2. Customers and Markets – expanding to whom the buyer and seller sell
  3. Economies of Scale – reducing costs based on the same revenue volume
  4. Intangibles – creating more intangible asset value as one firm, rather than two separate firms

Luckily, most of the M&A process is still at the surface – such as analyzing the financial and operational data, identifying hard assets and most importantly, retaining the workforce in place as you purchased. The incremental value process is attempting to identify what is below the surface and might be missed by the fog of the M&A process. The more organized the incremental value process is, the easier day one of the merger or acquisition will be.

Mike Metzler CPA/ABV, CMA, CGMA, ASA