Set the price you will walk away at

Your report suggested a move on at least one of these two questions:

• whether you could live with the true downside;
• whether you are paying the seller for your own synergies, or your own integration cost.

This move guide builds the downside on the target alone, with no synergies, and asks whether the price still stands. It splits the value into what any buyer would pay for and what only you can unlock. Then it sets the walk-away price before the auction sets it for you.

1. When it applies

Use this move guide if your report placed either question at "Red flag" or "Doubtful".

If both already sit at "Supported" or higher, skip this move guide.

2. What to do

Four steps. They take one to two weeks, before the final bid.

1. Build the downside on the standalone case alone, with no synergies. Name the events that drive it.
2. Check that the price still makes sense in the downside. If it does not, the synergies are the whole bet. Say so to the board.
3. Split the value into layers: the target on its own, the synergies any buyer could get, and the synergies only you can get. Take off the full cost of integration: money, people and attention.
4. Set the walk-away price from that valuation, in advance. Give one named person the authority to stop the deal.

Table A below holds the layers and the walk-away price.

3. What to produce

One table.

Table A. The value in layers

Pay for the target on its own and the synergies any buyer could get, at most. The rest is yours to keep.

4. A worked example

Illustrative. Written for this move guide. It describes no client.

A chemicals group is bidding for a maker of specialty coatings in an auction. The price has risen in each round.

The downside.

• Without synergies, the deal team built a downside on two events: the loss of the largest customer and a year of weak construction. The target alone was then worth less than the second-round bid.

The layers.

• Any large chemicals buyer could save on raw materials. Only this group could sell the coatings through its own distributors. The team priced the first and kept the second.

The walk-away.

• The board set a walk-away price before the final round and named the chief financial officer to hold it. The group dropped out of the auction at that price.

Two weeks on.

On a retake, both questions could be answered at "Supported".

What it looked like in our work

From our own work. Figures changed.

For a buyer of a branded food manufacturer, our due diligence built a downside the seller's forecast left out. Retailers' own brands could take around half of the main channel's growth. The target's growth then fell well short of its forecast, in both a low and a high case.

Even the milder case cut the forecast growth by more than half, and earnings with it. The price had to stand on that case, before any synergy.

5. Effort and dependencies

What you need

• The standalone case from testing the record and the seller's plan.
• The weighted synergies from sizing the synergies and planning the unlock.

How long

• One to two weeks, before the final bid.

What gets in the way. We have seen this in our own work:

• A downside hidden in a contract. For a healthcare provider, the largest contract's pricing basis could revert at its next tender. That was the realistic downside, and it belonged in the model.

6. How will you know it worked?

The test is whether the price stands on the target alone in the downside, and whether someone can stop the deal. Retake the check before the final bid. Each of these should be true when you answer:

The worked example is illustrative.

Think we've used your work without proper credit? Tell us and we'll fix it.