In M&A, Price Is a Function of Risk. And Risk is Our Playground.

A deal is shaped and solidified by many factors and external and internal dynamics.
A complex deal ought to be explained in simple terms in order to work.
We suggest two reliable and time-tested formulas.
Price of asset = Opportunity (expected return) / Risk
Often called Risk – Reward Ratio.
In the sense of a M&A transaction, a deal is a sale of an asset/business or a part of it (shares/equity). In the eyes of the seller/founder what is being transferred is a (revenue generating or not yet) product or service which has a (sustainable) competitive advantage and a (feasible) growth potential (market share/revenue/profit).

What the seller transfers is an asset (a product or service) with a sustainable moat/competitive advantage and a growth potential. What the buyer acquires is all of that plus the potential for synergies, efficiencies, and financial upside from the business combination.

Price = (1) the present and projected value of the asset − (2) the combined quantified effect of the identified and potential risks + (3) the combined quantified positive effects of the combined/merged businesses

The risk is inherent in the information asymmetry. The buyer knows less about the target than the seller, and the sale process compressed in a short period of time (regardless how rigorous the due diligence is) cannot eliminate errors and omissions. That risk is factored into (i) the valuation, (ii) the deal structure, and (iii) the legal arrangements between the parties. The sell- and buy-side advisors’ role is to allocate and price the risk during the negotiations and help the parties agree on how to manage it (and pay for it) across the lifetime of the contract.

Advisor selection matters and can reflect, or even determine, the final purchase price.

Expert advisors on both sides can significantly contribute to and influence each of the three price components mentioned above. The right teams surface risks, structure the risk allocation, and shape the narrative around value.

Choosing an advisor is, in itself, a pricing decision. Calculate who sits beside you at the negotiating table. Wouldn’t you choose people who lift you up?