M&A Deal Points | Unlocking Synergies in M&A: How They Impact Purchase Price

In mergers and acquisitions, strategic buyers—whether corporate entities or private equity portfolio companies—place higher value on targets when they can realize synergies. But what exactly are synergies, and how do they influence purchase price? Let’s explore.

How Strategic Buyers View Synergies

Unlike non-strategic buyers, who value a business based solely on its current benefit stream (e.g., EBITDA), strategic buyers consider both the baseline benefit stream and the synergies they can achieve post-acquisition. These synergies—when measurable and reasonably certain—can significantly enhance the value of the target for the buyer.

Four Categories of Synergies

Strategic buyers evaluate synergies across four primary areas:

1. Cost Savings Synergies

These are often referred to as “hard” synergies due to their quantifiable nature.

• Examples: Reducing facility expenses, streamlining payroll, consolidating marketing budgets, or negotiating better vendor contracts.

2. Revenue Enhancement Synergies

These synergies arise when the combined entity can achieve greater sales growth than the individual businesses could alone.

• Examples: Expanding the target’s products or services through the buyer’s established sales or distribution networks.

3. Gross Margin Enhancement Synergies

By leveraging the buyer’s purchasing power, the target benefits from lower costs with suppliers and vendors, improving overall margins.

4. Strategic Synergies

These synergies are often harder to quantify but provide long-term strategic advantages.

• Examples: Accelerating time to market (buy vs. build), eliminating competitors, expanding into new markets, acquiring unique talent (acquihires), and gaining marketing or branding advantages.

Do Synergies Impact Purchase Price?

While synergies increase the value of a target for the buyer, they aren’t always fully reflected in the purchase price.

• Buyers’ Perspective: Synergies are often seen as a result of the buyer’s operational capabilities, meaning they are less inclined to share the full value of these synergies with the seller.

• Competitive Pressures: In highly competitive bidding scenarios, buyers may be forced to share a portion of the projected synergies with sellers to secure the deal. This is where a skilled M&A advisor plays a critical role in driving competition and maximizing seller value.

Why Synergies Matter

Synergies aren’t just theoretical—they are a key driver in how strategic buyers approach deals. By identifying and quantifying these synergies, buyers can justify higher valuations, while sellers can leverage competitive processes to capture a share of the value.

Having experienced M&A advisors on your side ensures that these dynamics work in your favor, whether you’re buying or selling a business.