Why agreeing on fair market value is not enough — and what PE funds and strategic acquirers are really checking before they sign
Most sellers assume the hard part of a transaction is agreeing on price. If both sides can converge on a fair market value, the deal should close. In practice, that is often where the real analysis begins — not where it ends. Whether your buyer is a private equity fund or a strategic acquirer, they are not just asking whether the price is fair. They are asking whether the acquisition, at that price, will generate adequate returns on the capital deployed. These are two entirely different questions, and the answer to the second one kills more deals than the answer to the first.
When a mature business with stable, visible earnings sits across the table from a strategic acquirer in the same sector, there is usually less disagreement on intrinsic value than people assume. Both sides understand the business model. Both have a view on the market. Both can build a DCF and a comparable companies analysis. The target's management knows the company better, but the acquirer's team knows the sector well enough to stress-test every assumption. In these cases — where the P&L reflects the company's full earning potential — the two sides' views on standalone fair market value tend to converge within 10–15% relatively early in the process.
This is an important qualification. When a company's value depends partly on a pre-revenue asset — a pipeline product, an unlaunched technology platform, a pending regulatory approval — the gap between buyer and seller can be enormous. The EBITDA reflects the cost of building the future without any of the revenue it will generate, and two rational parties applying different valuation frameworks to the same asset can reach numbers that are 50% or more apart. That is a different problem, and one that requires a different set of tools to solve — sum-of-the-parts analysis, probability-adjusted DCFs, or earnout structures that defer the disagreement to a future milestone. We wrote about this in detail in When EBITDA Multiples Get It Wrong.
But when both parties agree on what the business is worth — when the valuation conversation has converged — sellers often assume the hard part is over. It is not. That is where a second, less visible filter comes in, and it is the one that kills deals that should otherwise close.
For many mid-market companies in consumer, beauty, and healthcare, the most likely buyer is a private equity fund. And a PE fund that agrees your company is worth EUR 20 million has not decided to pay EUR 20 million. They have decided that the standalone value is defensible at that level. The next question — the one their investment committee actually cares about — is whether acquiring your company at that price will generate the returns their fund needs to deliver to its investors.
The test is straightforward: at the proposed entry price, with a realistic set of assumptions about growth, margin improvement, and exit multiple, can the fund achieve its target return — typically a 2.5x or higher multiple on invested capital and a 20%+ internal rate of return over a five-year hold? If the answer is no on a standalone basis, the deal does not clear the investment committee regardless of whether the price is fair. The acquisition may be correctly valued and still be a bad deployment of the fund's capital.
This is why PE buyers are so focused on the business plan. They are not just checking whether your numbers are accurate. They are modelling whether the company, at the price you are asking, can deliver the return profile that justifies committing their investors' capital. Every assumption in your plan — revenue growth, margin trajectory, capex requirements, working capital dynamics — feeds directly into that IRR calculation. A plan that is credible but shows modest growth at a full valuation will not clear the hurdle. A plan that shows strong growth but rests on unsubstantiated assumptions will be discounted to the point where it does.
When the buyer is a strategic — another operating company in your sector or an adjacent one — the return framework is different but the logic is the same. A strategic acquirer who agrees that your company is worth EUR 20 million has not decided to pay EUR 20 million. They have decided that the standalone value is defensible. The next question is whether the acquisition, at that price, will create or destroy value for their own shareholders.
The fundamental test is projected pro forma return on invested capital over the years following the acquisition, calculated excluding synergies. This is not a day-one snapshot — it is a trajectory. If the acquirer deploys EUR 20 million for a business generating EUR 1 million in net income today, the year-one pro forma ROIC is 5%. If their cost of capital is 8%, the deal destroys value in year one. But if the target's operating profit is projected to grow to EUR 1.8 million by year three, the pro forma ROIC rises to 9% — above the WACC threshold. That trajectory is what the acquirer's team models. The question is not whether the return clears the hurdle on day one, but whether it clears it within a reasonable timeframe and stays above it. For the deal to make sense without relying on synergies, the projected pro forma ROIC must cross above the acquirer's weighted average cost of capital on the strength of the target's own business plan. This is the real value creation test for strategic M&A.
If the strategic acquirer is a publicly listed company, there is an additional filter: projected pro forma earnings per share over the first two to three years. The acquirer's board and analysts will check whether the deal is EPS-accretive or EPS-dilutive — not just in year one, but over the projection period. A deal that is dilutive in year one but accretive by year two because the target's earnings are growing fast is a much easier story to tell than one that stays dilutive. But EPS accretion, even over multiple years, is a flawed metric. A deal can be accretive every single year and still destroy value — this happens when the acquirer trades at a high earnings multiple and buys a lower-growth business at a lower multiple. The arithmetic mechanically produces accretion, but the target's returns on capital may sit well below the acquirer's cost of capital. The acquirer bought cheap earnings that made the per-share number go up while deploying capital at inadequate returns. Conversely, a deal can be dilutive and create enormous value — the target's returns on capital far exceed the cost of capital, but its high multiple makes the EPS arithmetic unfavourable. Despite its flaws, EPS matters because the market reacts to it on announcement day and the deal team will have to address it in every board presentation. If your deal is EPS-dilutive for a public acquirer, you need to know that going in — not because it means the deal is bad, but because the acquirer will need a clear answer for why it is still worth doing.
The natural response is: but what about synergies? Whether it is a PE fund planning operational improvements or a strategic acquirer expecting cost savings and cross-selling, the combined or improved entity should be worth more than the standalone business. Revenue synergies, cost synergies, procurement savings, overhead elimination, operational efficiencies — these are real sources of value.
They are also, in every rigorous buyer's framework, treated as upside — not as the base case. A disciplined buyer structures the deal so that it generates adequate returns even if the improvement plan underdelivers or takes longer than expected. The reason is simple: synergy and value creation realisation rates in M&A are historically poor. Studies consistently show that 50–70% of acquisitions fail to deliver the projected synergies or operational improvements on the original timeline. Cost synergies are more reliable than revenue synergies, but even cost synergies face execution risk — restructuring costs, integration delays, key employee departures, system migration failures.
An investment committee or board that approves an acquisition where the returns only work if the improvement plan is fully realised is taking a bet, not making an investment. The best acquirers — whether PE or strategic — structure every deal so that the standalone return clears the hurdle. Synergies and operational improvements are the margin of safety, not the foundation.
If you are a founder, CEO, or CFO preparing to sell your company, understanding this dynamic changes how you approach the process. It is not enough to be confident that your company is worth a certain number. You need to understand what that number looks like through your buyer's lens — whether that buyer is a PE fund modelling IRR and cash-on-cash returns, or a strategic acquirer checking ROIC against their cost of capital.
If the deal clears the buyer's return hurdle on a standalone basis, you are in a strong position. The buyer can justify the price to their investment committee or board without depending on an optimistic improvement plan. The deal has a structural margin of safety, which makes the buyer more willing to move quickly and compete aggressively against other bidders.
If it does not — if the returns only work with synergies or aggressive operational improvements — you are in a fundamentally different negotiation. The buyer will either push the price down to a level where the standalone returns work, structure a significant portion of the consideration as an earnout or deferred payment, or walk away entirely. In any of these scenarios, the seller who did not anticipate the issue ends up reactive, negotiating from a weaker position because they did not understand what the buyer was optimising for.
The practical implication is that before entering a sale process, you should model not just your own valuation but the return profile for likely buyers over their expected hold period. For PE: at your expected price, what IRR and multiple does the fund achieve under conservative assumptions over five years? For strategics: does the projected pro forma ROIC cross above their WACC within a reasonable timeframe based on your business plan? If the acquirer is public, is the deal EPS-accretive or dilutive over the first two to three years — and if dilutive, is there a credible path to accretion as earnings grow? If the answer to any of these questions is unfavourable, you need to either adjust your price expectation, identify buyers for whom the economics work better, or prepare a credible value creation case that de-risks the deal for the buyer.
The right valuation gets you to the table. But the deal closes — or doesn't — based on whether it generates adequate returns for the buyer. If you don't model that before they do, you will be negotiating blind.
Bonneau Advisory — M&A Strategy for Consumer, Beauty & Healthcare