Acquisition · Method
Evaluating an acquisition target
activity by activity: the five-question
grid
If you can spot a synergy, so can the other bidders in the process —
and the seller will make you pay for it. The useful question is therefore not “where are the synergies?” but
“which ones are mine alone?”
Published 1 August 2026 — updated 1 August 2026
Most analyses of an acquisition target stop at a sum: list the synergies, put a figure on them, add them to EBITDA, apply a multiple. The exercise always produces an encouraging result — which alone should make it suspect.
The flaw is structural. A synergy has no value in itself: it has value for someone. If three buyers in the process can achieve it, it is priced in and the benefit goes to the seller. The only synergies that count are the ones you alone can capture.
This article sets out a method for isolating them when evaluating an acquisition target: break down the target's value chain, ask five questions of each activity, score, aggregate. A worked example takes the whole process through to its impact on price.
01 · The groundwork
Segment before you break down the value chain
The first mistake, and a fatal one: analysing “the” value chain of a company that has several.
A company serving both aerospace and automotive does not have one value chain but two. Production runs differ, qualification requirements differ, payment cycles differ, key success factors differ. Breaking down the whole produces an average that describes no reality and hides precisely what you are looking for: where the value lies.
The first step is therefore to identify the genuinely distinct business segments — by market served, technology or business model — and keep only those that interest you. A target can be excellent in one segment and of no interest in the others. That conclusion alone already points towards a carve-out rather than a full acquisition.
02 · The breakdown
How finely to break down a target's value chain
The framework is well known: primary activities — procurement, production, logistics, sales and marketing, service — and support activities — R&D and industrialisation, information systems, human resources, administration. What matters is not reciting this list but knowing when to isolate an activity.
Three criteria determine whether an activity should be isolated:
Economic weight. An activity accounting for more than 10% of total costs deserves its own line.
Its own economics. An activity whose costs behave according to a logic distinct from the rest — economies of scale, learning effects, regulatory constraints — must be treated separately.
Potential for differentiation. An activity in which the target outperforms its competitors must be isolated, even if its cost weight is small. That is often where the value lies.
Negotiate the definition before you negotiate the level. A covenant at 3.25× on a narrow definition is more comfortable than a covenant at 3.75× on a broad one.
The point that gets forgotten
Competitive advantage often lies less in a single activity than in the coordination between activities — the link between the engineering office and production, between production and logistics. The direct consequence for the buyer: a target whose performance comes from its internal interfaces is far more fragile to integrate than one whose performance comes from an activity that can be isolated. Its very quality makes integration harder.
03 · Question 1
Complementarity or similarity?
For each of the target's activities, a preliminary question: does it overlap with an activity you already carry out, or does it occupy a position you do not?
Similarity — same activities, same position in the chain — produces cost synergies: consolidation of support functions, greater purchasing power, absorption of excess capacity. The gain is measurable and quick. On the other hand, it requires heavy — and therefore disruptive — integration, and it can almost always be achieved by another buyer.
Complementarity — adjacent activities, upstream or downstream — produces revenue synergies: access to a channel, a technology, a qualification, a customer segment. The gain is harder to quantify and slower to materialise, but it tolerates light integration and is frequently proprietary.
Neither logic is superior. The mistake is not to have chosen before comparing several targets: you then compare objects of a different nature using the same criteria.
Score 0 to 5 — Strategic fit
0 · complete overlap with no excess capacity to absorb
3 · partial overlap with a genuine scale effect
5 · pure complementarity — the target occupies a position you do not
04 · Question 2
Is the synergy generic or proprietary?
This is the central question of the method — and the one conventional analysis skips.
A generic synergy can be achieved by any comparable buyer. Pooling raw-material purchasing, absorbing the accounts function into an existing department, using greater bargaining power: any buyer of a certain size can do it. The seller's adviser knows this, builds it into the valuation pitch, and the competitive process does the rest. You will pay for this synergy; you will not gain from it.
A proprietary synergy depends on an asset, a position or know-how that you hold and the other bidders do not: in-house volume that on its own makes one of the target's machines profitable, a distribution network into which its product slots immediately, a customer qualification you have been pursuing for three years. It cannot be replicated, so it is not reflected in the market price.
The test: if my two main competitors bought this company tomorrow, would they achieve this gain? If so, the synergy is generic. The answer must be written down in black and white, activity by activity.
Score 0 to 5 — Proprietary nature
0 · any comparable buyer achieves this gain
3 · only two or three buyers, including you
5 · you are the only identifiable buyer able to achieve it
05 · Question 3
Buy or build?
For each activity judged attractive: how much would it cost to rebuild it in-house, and how long would it take?
The question sounds blunt; it is healthy. A regional sales force of twelve can be recruited in eighteen months at a known cost. A standard machining workshop can be equipped in nine months. On the other hand, an operating permit, a customer qualification obtained after three years of audits, an installed base of several hundred customers, a brand established for forty years: these cannot be rebuilt, or only over a horizon that makes the exercise pointless.
An acquisition premium is justified only for activities that cannot be rebuilt. The rest you can build yourself — and that alternative is your best negotiating argument, precisely because it is credible.
Score 0 to 5 — Barrier to rebuilding
0 · can be rebuilt in under 12 months at a controlled cost
3 · can be rebuilt in 2 to 3 years, at significant cost
5 · cannot be rebuilt — permit, track record, established position
06 · Question 4
Can the activity be separated?
An activity can be highly attractive and completely inextricable. It shares an information system, a team, a framework contract, a brand or a site with the rest of the target.
This question serves two purposes. First, it shapes the deal structure: if only two activities out of eight interest you and they can be carved out, a partial acquisition becomes an option — cheaper and less risky. Second, it measures your exit capacity: a separable activity can be sold on if the investment case does not hold up. An activity merged into the whole cannot.
Score 0 to 5 — Separability
0 · fully intertwined — can be neither carved out nor sold on
3 · can be carved out through an identified separation project
5 · stand-alone — scope, team and contracts identifiable
07 · Question 5
What is the risk of deterioration?
This is the costliest blind spot. Post-acquisition value destruction rarely comes from a synergy that fails to materialise; it comes from something that worked and stops working because of the combination itself. These are known as dis-synergies.
The four most common forms:
Loss of customers through conflict. A customer of the target that competes with one of your customers — or with you — will not stay. This risk is detected by cross-checking the two customer portfolios before the letter of intent, not after.
Departure of key people. In an SME, an activity often rests on two or three people. Their departure does not just remove a skill: it sometimes takes the customer relationship with it.
Worse terms. A supplier renegotiating at the level of the new group may withdraw preferential treatment the target enjoyed because of its size or long-standing relationship.
Cannibalisation. Two similar offerings in the same segment replace each other instead of adding up.
The methodological rule: every quantified gain must be matched by a quantified risk on the same line. Without this constraint, the grid only produces positive results.
Score 0 to 5 — Resilience to the combination (reverse score: 5 = low risk)
0 · dis-synergy identified, quantifiable and likely
3 · real risk, but one that deal structuring can mitigate
5 · no negative effect identified
08 · The aggregate score
Weighting, aggregating and reading the target's score
The five questions do not have the same discriminating power. Proprietary nature carries the most weight: it determines whether the gain goes to you or to the seller. Separability carries the least: it informs the deal structure without determining whether the deal is worth doing.
Activity score (out of 100) = [ (Q1×2) + (Q2×3) + (Q3×2) + (Q4×1) + (Q5×2) ] × 2
How to read the result
Above 70 — an activity that creates proprietary value. This is what you are really buying, and what justifies a premium.
50 to 70 — a contributing activity. It has value, but value the market knows about. To be paid for at market price, with no premium.
30 to 50 — a neutral activity. You pay for it; it brings you nothing specific. It comes with the rest.
Below 30 — an activity to watch. Either carve it out, integrate it with an explicit plan, or remove it from the deal perimeter.
A practical point: the target's average score matters less than the concentration of high scores. A target averaging 48 with two activities above 85 is a better deal than a perfectly flat target averaging 60. The first has a core investment case; the second is just a sum.
09 · Worked example
A worked example from start to finish
The context
SOMEX — buyer. Machining of metal components, EUR 48m revenue, EUR 8.4m EBITDA, two sites in Auvergne-Rhône-Alpes. Customers: rail and energy equipment. Outsources all of its surface treatment, at EUR 2.8m a year. No aerospace qualifications.
ALTIMEC — target. Precision machining and surface treatment, EUR 14m revenue, EUR 2.1m EBITDA, one site in Occitanie. Aerospace customers. Holds the required sector qualifications and an operating permit for its treatment workshop. Asking price: EUR 14.7m, i.e. 7× EBITDA.
Case constructed for illustrative purposes. The companies are fictitious and the figures illustrative.
The grid applied to the eight activities
What the grid reveals
Surface treatment scores 92. SOMEX currently outsources EUR 2.8m of treatment work a year. By bringing it in-house at ALTIMEC's workshop — which has spare capacity and an operating permit that takes at least three years to obtain — it captures its current subcontractor's margin. No other buyer in the process brings this in-house volume. The synergy is proprietary in the strictest sense: it arises from the meeting of a SOMEX need and an ALTIMEC asset.
The aerospace qualifications score 80. They open up a market to SOMEX that it cannot address today and that would take it three to four years to qualify for on its own. The score is slightly lower on resilience: sector qualifications do not transfer automatically on a change of control, and prime contractors have a right of review. This point will need to be dealt with as a condition precedent.
Aerospace sales drops to 58 because of a single criterion. ALTIMEC's second-largest customer, with EUR 1.9m of revenue, is a direct competitor of a SOMEX customer in energy equipment. The risk of losing it is real and must be provided for.
The last four activities score below 45. They carry very real synergies — pooled purchasing, absorption of support functions — but entirely generic ones. The seller's adviser knows about them and has put figures on them. They are what drives the price up, not what will make SOMEX money.
From score to price
Three distinct values follow from the grid:
The context
The asking price is EUR 14.7m, but that is not the price SOMEX will pay. As soon as a competitive process opens, several buyers can justify EUR 17.5m without destroying value — that is the real market floor.
The value to SOMEX comes to EUR 23.5m. The EUR 6m gap between the two measures its capacity to outbid while still creating value. And that gap comes from two activities out of eight. The rest of the investment case is padding paid for at full price.
Three operational consequences follow — none of which a simple sum of synergies would have produced. Due diligence must focus its resources on the transfer of qualifications and the treatment workshop's remaining capacity: that is where the value is, and therefore where the risk is. The letter of intent must make retention of the qualifications a condition precedent. And the integration plan must touch aerospace sales as little as possible, where every move can cost more than it brings in. That is what evaluating an acquisition target activity by activity changes.
10 · The pitfalls
Five mistakes that distort the grid
Scoring after deciding. A grid filled in to justify an intention already formed systematically produces the expected score. Have two people score separately, then compare the differences: they are what is informative.
Confusing the target's attractiveness with its attractiveness to you. An excellent company none of whose activities connect with yours is a good company, not a good acquisition.
Quantifying the gains and guessing the risks. The asymmetry of rigour between the two columns is the most common bias. A quantified gain calls for a quantified risk.
Forgetting the cost of integration. A EUR 400k synergy that requires EUR 900k of IT migration and eighteen months of disruption is not a synergy.
Analysing without looking at the other bidders. Whether a synergy is proprietary is not declared in the abstract: it follows from who the other plausible buyers are. That list is part of the analysis.
11 · Frequently asked questions
What business owners most often ask about evaluating an acquisition target
A generic synergy can be achieved by any comparable buyer: pooled purchasing, absorption of support functions, greater bargaining power. It is priced into the market price and benefits the seller. A proprietary synergy depends on an asset or position that only you hold; the other bidders cannot replicate it, and it is the buyer's only real source of value creation.
An activity should be isolated as soon as it accounts for a significant share of costs, follows its own economics, or is a potential source of differentiation. In practice, six to ten activities are enough for an SME. Fewer, and the analysis is too coarse to discriminate; more, and it becomes unmanageable without adding any decision-making precision.
A dis-synergy is value destruction caused by the combination itself: loss of a target customer that refuses to be served by the new shareholder, departure of key people, worse supplier terms renegotiated at group level, or cannibalisation between two similar offerings. Dis-synergies explain most post-acquisition failures, more than synergies that fail to materialise.
Both approaches are valid but are not managed in the same way. Similarity produces cost synergies that are measurable but usually generic, and requires heavy integration. Complementarity produces revenue synergies that are harder to quantify but often proprietary, and tolerates light integration. The choice must be made before comparing targets; otherwise you end up comparing objects of a different nature.
By distinguishing three values: the target's stand-alone value, its value to a generic buyer — which sets the floor price in a competitive market — and its value to you, including your proprietary synergies net of dis-synergies. The gap between the last two measures how far you can outbid without destroying value. Paying beyond that means handing your advantage to the seller.
This article presents an analysis method and a case constructed for illustrative purposes. It does not constitute personalised advice or an investment recommendation. Every transaction must be assessed on its own merits.
The grid
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Further reading
From the activity-by-activity score to a valuation range you can defend in front of counterparties.
Applying the grid to a series of acquisitions rather than to a single target.
Turning the grid's conclusions into conditions precedent and warranties.