Validating Your M&A Deal Thesis: 4 Key Steps to Ensure Strategic Alignment and Success

What exactly is a deal thesis?

A deal thesis articulates the compelling and simple reason why an acquisition makes sense.

The deal thesis drives you to stake your reputation and finite resources on the line to get a deal done. It’s how you will explain the deal to all your stakeholders. It’s also a signal you send to the market about your strategic priorities and how you allocate capital.

But the reasons why you should not do a deal are just as important. You should steel man your deal thesis to also list all the reasons against doing the deal. This Is critical because it reduces confirmation bias, helps identify key risks, forces rigorous scrutiny, and ultimately sharpens your focus when validating the deal thesis.

How to validate a deal thesis

Validating the deal thesis is all about pressure testing each of the key “value drivers” – these are the critical elements that will make or break the acquisition.

You want to ensure M&A is the right path among all your other options. You want to thoroughly kick the tires and get clarity on how you will create value from the deal. You’d be surprised as to how many deals are done with a half-baked, 10,000-foot idea of how things will come together. 

Here’s a 4-step framework for validating the deal thesis:

1. Establish A Strategic Foundation
2. Identify and Focus on Key Value Drivers
3. Conduct Targeted Diligence
4. Iterate on a Comprehensive Integration Plan

Let’s dive in.

Step 1: Establish A Strategic Foundation

Before diving into deal validation, ensure your organization has clarity on two foundational elements that can get overlooked in the excitement of deal-making.

• 1) Define your M&A strategy
  • Be clear on how M&A will support the overall corporate strategy. Identify priority areas and problem statements you are looking to solve
  • Determine the types of deals you will do (and not do), setting clear criteria for target selection to filter opportunities efficiently
• 2) Evaluate alternatives
  • Ensure M&A is the right tool
    • Are we doing this because we can't build it ourselves? Or because a partnership wouldn’t enable the user experience we want? When you think about the classic build/buy/partner assessment, it often boils down to speed and cost.
  • Test partnerships before acquisition
    • If you're considering buying another company to cross-sell its products to your user base, try a white-label partnership first to validate the thesis.
  • Understand the landscape
    • Sometimes a specific capability you’re looking for doesn't exist in the form of an appropriate target, leading to a clearer decision to build or partner instead of acquiring.
  • Don't fall into the trap of forcing M&A
    • M&A is often opportunistic and reactive, but you should refer back to your target criteria and not evaluate each opportunity as a one-off.

Once you have the above two elements in place, it becomes fairly straightforward to develop your deal thesis.

Step 2: Identify and Focus on Key Value Drivers

Value drivers complement a deal thesis by clarifying the assets and opportunities that matter most to the acquirer.

Your initial instinct may be to include as many drivers as possible to validate why something is an amazing opportunity. But you shouldn’t feel the need to ‘over-justify’ the deal. It would be completely acceptable to just have one reason. As long as it's THE reason that drives your decision to do the deal.

One way to ensure you have the right set of value drivers is to ask yourself for each: 

“If this were no longer true, would I still do the deal? Would I pay a different price, adjust the deal structure, keep things as-is, or walk away?”

Then, break down the value drivers into specific, testable hypotheses. They should articulate how the deal creates value. What are all the things that have to be true? Identify the areas that, if proven false, would materially impact the deal’s success.

Step 3: Conduct Targeted Diligence

Focus 90% of your due diligence efforts on the critical value drivers rather than spreading resources too thin across all aspects of the business.

Figure out what actions you can take to test your hypotheses. What questions need to be answered? Who do you need to be involved? And what type of information do you need to collect?

All these actions need to be prioritized to avoid overwhelming the target. Stage what you can validate during preliminary diligence (pre-LOI) vs confirmatory diligence (pre-sign). You will need to balance how deep you dig in within the constraints of the deal. It should all feed into stress-testing the deal model and integration plan, as well as how the deal is negotiated and structured.

Let’s see what steps 2 & 3 could look like, using some common value drivers and sample hypotheses to determine how to start targeting diligence to validate the deal thesis:

This is certainly a non-exhaustive list but gives you a sense of the methodical approach you should take. 

Step 4: Iterate on a Comprehensive Integration Plan

Integration planning should start during deal validation, not after closing. Along the way, you’ll learn something new. If things turn out to be different than what you initially expected, go back to the original hypotheses and adjust accordingly. 

A few important call-outs at this stage:

• Resource Allocation
  • Ensure integration is prioritized. Many acquisitions fail because integration doesn’t make it up the priority list against existing projects.
  • Secure post-close investments. If you don’t invest behind the deal, then it’s doomed from the start.
  • Plan for sales enablement early. If you're bringing in new products to cross-sell, you need to align with how/when you will go-to-market as one organization.
  • Budget for hidden costs. Consider things like systems integration, training, and potential productivity dips during transition.
• Stakeholder Alignment
  • Identify the true deal owner. Don't let corporate development own post-close success. The deal sponsor needs to be on the hook.
  • Have hard conversations early. Getting input from leaders from both the acquirer and target pre-sign on key integration decisions can smooth out the process.

Stay focused on value drivers throughout the process. Don't let deal excitement overshadow key findings and practical integration challenges that may arise.

The fine print

1. There is no silver bullet in M&A. You can’t always ‘try before you buy’. There is a limit in what you can do before joining forces. And sometimes, things change unexpectedly - new regulations, technologies, and competition can throw your entire plan out the window. You just won’t know how things will change. 
2. All the validation in the world won’t help if your CEO changes their mind and decides it's not worth investing behind the acquisition post-close.
3. If you’re taking not one but many leaps of faith to ensure your value drivers make sense, you should reconsider before loosening the purse strings.

Conclusion

A clear deal thesis gives the entire M&A team a roadmap for aligning strategy, due diligence, and integration planning. Validating helps maximize the acquisition’s value and reduces risks, improving the success rates of transactions. 

For more insights, tune into the M&A Science Podcast for the latest strategies and expert discussions on validating a deal thesis and more. Check out my recent episode to learn more!