M&A due-diligence case: how to solve one step by step

In this article

1. Before you start
2. Why interviewers ask this
3. M&A due-diligence case from first principles
4. Worked example
5. Trade-offs and edge cases
6. How to answer it in an interview
7. Common mistakes
8. Follow-up questions
9. Sources

Before you start

This page is one step of the consulting case interview learning path, and it works as a standalone tutorial.

Why interviewers ask this

The case separates a good company from a good deal. A company can be excellent and still be a poor investment at too high a price, so the question tests whether you can put a number on the most the buyer should pay.

A weak answer lists the target's strengths and says "buy". A strong answer tests the market and customers first, values the target on its own, sizes the synergies with honest haircuts, caps the price, and names the integration risks that could break the plan. A Staff-level answer also says which piece of evidence would change the recommendation. Candidates report meeting this case in consulting interviews and in private-equity-style rounds; no public source gives how often, so treat it as one of several case types you should be able to run. Compare it with the profit-tree logic in the profitability case walkthrough.

M&A due-diligence case from first principles

Synergy

A synergy is a gain in value created by combining two companies that neither would earn alone, usually grouped into cost, capital and revenue levers. Cost synergies remove duplicate spending, capital synergies release cash tied up in assets such as working capital or shared facilities, and revenue synergies add sales such as cross-selling.

Stand-alone value

Stand-alone value is what a target company is worth to its current owner running it as it is, with no benefit from the buyer. It is the floor of any sensible price, because the seller can keep the business and receive that value anyway.

In plain words

Think of buying a run-down house to renovate. First you inspect it and check the street. Then you work out what it is worth as it stands. Next you estimate how much value the renovation adds. Your highest sensible bid is the as-is value plus the renovation gain, and you bid below that. If you pay the seller the whole gain, you did the work for nothing. The analogy breaks in one place: a company's gain needs staff, customers and systems to cooperate, and they may not.

In one precise sentence, the case asks you to compare the maximum price the combined value supports with the price the seller will accept, and to say whether the gap is worth the risk.

Step 1: Test the deal logic and the target before any valuation

The first step asks why this buyer wants this target, and whether the market and the target's customers support that story. State the strategic reason in one line, such as growth, a missing capability or lower cost. Then test whether building or partnering would be cheaper than buying.

Commercial due diligence is the evaluation in which a buyer assesses a target from a commercial point of view: its market, competitive position, customers, pipeline and the achievability of its business plan (DealRoom, accessed October 2026). The Institute of Chartered Accountants in England and Wales (ICAEW) guideline says its commentary rests on market, competitor and customer evidence plus the target's business model and its financial and commercial performance, and it is not an audit. A red-flag review looks for risks that could break the deal, for example customer concentration, a declining market or an unrealistic forecast.

Input: the deal story and the target's market. Output: go on, or stop. Size the market with market sizing when the interviewer gives none.

Step 2: Value the target alone and size the synergies

A stand-alone valuation starts from the target's own earnings. A valuation multiple is the price of a company as a number of times a measure such as EBITDA, so the quick estimate is the target's EBITDA times the multiple of similar companies, an assumption you state aloud. EBITDA times a multiple gives enterprise value; subtract net debt to get the price for the shares (this example assumes no debt).

Then size the synergies. Cost synergies come from removing duplicates, and McKinsey (October 2017) calls cost cutting more intuitive, for example eliminating duplicate information technology (IT), human resources or executive functions. Revenue synergies, such as cross-selling, are harder: the same article says pre-deal estimates are in many cases based on little more than gut-level, back-of-the-envelope calculations. So apply a bigger haircut, a stated percentage cut, to revenue than to cost. Subtract the one-time integration costs, then turn the annual net figure into present value.

Input: earnings, a multiple, synergy estimates. Output: stand-alone value and net synergy value.

Step 3: Set the price ceiling and never pay away all the synergies

The price ceiling is the highest price at which the buyer still earns its required return: stand-alone value plus the net present value of net synergies. At that price the buyer's gain is zero, because every unit of synergy value has gone to the seller, who already receives the stand-alone value.

So you bid below the ceiling. The gap between your offer and the stand-alone value is the premium, and it is the share of the synergies you hand over. Keep a margin because the synergies are uncertain. In one McKinsey study (June 2010), due diligence before a merger failed to provide an adequate roadmap for capturing synergies 42 percent of the time, and the same piece says due diligence has only limited ability to set accurate expectations of total synergies.

Input: the two values from Step 2. Output: a ceiling and an offer below it.

Step 4: Check integration risk, payback and make the call

Integration risk is the chance that combining the companies destroys part of the value you counted. McKinsey warns that one of the biggest mistakes is moving too fast to capture revenue synergies without confirming that pre-deal assumptions will not threaten the base business (October 2017). Its distribution-merger example had more than 2,000 overlapping accounts, putting some 15 percent of combined revenue at risk. A 2015 survey in the same article found more than a third of respondents failed to achieve their revenue goals after a merger.

Compute payback as the premium plus integration costs, divided by annual net synergies. Then recommend: the decision, the price and conditions, the top two risks, and the next diligence step.

In short: the first step tests the deal logic and the target before any valuation; the second values the target alone and sizes the synergies; the third sets a price ceiling of stand-alone value plus net synergy value; the fourth checks integration risk and payback before the recommendation.

1 · Test deal and target2 · Value and synergies3 · Price ceiling4 · Integration and callReplay

Step-by-step description

1. Check the strategic fit, market and customers first.
2. Value the target alone, then size net synergies.
3. Ceiling is stand-alone value plus net synergy value.
4. Check payback and risks, then recommend.

• The first step tests the deal logic and the target before any valuation.
• The second step values the target alone and sizes the synergies.
• The third step sets a price ceiling of stand-alone value plus net synergy value.
• The fourth step checks integration risk and payback before the recommendation.

Worked example

Every figure below is illustrative, in millions of one unspecified currency, and the arithmetic comes from a script.¹ The target has EBITDA of 50 and similar companies trade at 9 times EBITDA, so the stand-alone value is 450. The buyer expects run-rate cost synergies of 30 and assumes 80 percent are realised, which is 24. It expects 60 of extra revenue at a 25 percent margin, a contribution of 15, and assumes only 50 percent is realised, which is 7.5. Annual net synergies are therefore 31.5.¹

Assume the synergies last ten years and discount at 10 percent. The annuity factor is 6.1446, so their present value is 193.55. After 40 of one-time integration costs the net synergy value is 153.55, and the price ceiling is 450 plus 153.55, which is 603.55.¹

Synergies are treated as pre-tax for simplicity; a full model taxes them first, which lowers the ceiling. Now stress the numbers. If revenue synergies fail entirely, the ceiling falls to 557.47. If cost realisation also drops to 50 percent, it falls to 502.17, still 13.78 above the offer of 488.39.¹ The offer survives a bad outcome. A bid at the base-case ceiling of 603.55 would not. In short, the base-case price ceiling is 603.55 million and the offer is 488.39 million, and the weak-case price ceiling of 502.17 million is still above the offer.

Text description of the diagram

• The base-case price ceiling is 603.55 million and the offer is 488.39 million.
• The weak-case price ceiling of 502.17 million is still above the offer.

Trade-offs and edge cases

The central trade-off is trust. Cost synergies come from a bottom-up list of duplicates and need a smaller haircut. Revenue synergy estimates are often back-of-the-envelope calculations and need a larger haircut. Cost cuts have their own risk of cutting too deep, and revenue plans can harm the base business.

Text description of the diagram

• Cost synergies come from a bottom-up list of duplicates and need a smaller haircut.
• Revenue synergy estimates are often back-of-the-envelope calculations and need a larger haircut.

Edge cases the textbook answer misses:

• Scarce assets. A buyer that must have a capability may rationally pay a high premium. Even then, say the ceiling out loud and name what you would walk away from.
• Competing bidders. A contested sale pushes the price up, but the ceiling does not move. Higher bids simply transfer more value to the seller.
• A weak stand-alone view. If the target's market is declining, the stand-alone value itself is overstated. Re-check Step 1 before trusting Step 2.
• Alternatives. Building the capability or partnering may beat buying. Always test them before recommending the most expensive option.
• Weak margins. If profit looks thin, decompose it with a profit tree before pricing; the case interview frameworks that still work in 2026 show how to structure that.

Reported practice differs on how much of the synergies a buyer should share, so state your share as an explicit assumption.

How to answer it in an interview

The spoken structure: say the four checks, give the ceiling formula, state that you bid below it, then close with risk and payback. Practise the delivery on the original practice cases with model solutions.

Common mistakes

• "It is a great company, so buy." (wrong) A great company can be a bad deal at a high price. (right) "The company is strong, but the deal only works below a price ceiling of X."
• "Due diligence is the financial audit." (wrong) Commercial due diligence is not an audit; it looks beyond the accounts. (right) "I would test the market, customers and plan behind the numbers."
• "The synergies are worth 150, so we pay 150 more." (wrong) That hands all the value to the seller. (right) "I offer part of the net synergy value and keep a margin."
• "Treat revenue synergies like cost synergies." (wrong) Revenue estimates are often gut-level. (right) "I haircut revenue synergies harder and test them with customers."
• "Ignore integration costs." (wrong) One-time costs reduce the net value. (right) "I subtract integration costs before computing the ceiling and payback."

Follow-up questions

What is the difference between financial and commercial due diligence?

Financial due diligence tests the accounts, earnings and cash flow. Commercial due diligence tests the market, competitors, customers and plan behind those numbers, and it is not an audit. A buyer usually runs both, alongside legal and operational checks.

What are synergies in an M&A case?

Synergies are extra value from combining the companies, grouped into cost, capital and revenue levers. Cost synergies are the easiest to estimate; revenue synergies, such as cross-selling, are the hardest to trust.

How do you value a target in a case interview?

State a stand-alone value from earnings times a peer multiple, mention precedent deals and discounted cash flows as cross-checks, and say every input is your assumption. Then add net synergies for the ceiling. The case math drills help you do this quickly.

Should the buyer build, buy or partner instead?

Test all three before recommending the most expensive. Buying wins on speed or scarce assets; building or partnering wins when the capability is cheap to develop or share.

Why do deals miss their synergy targets?

Pre-deal estimates are often rough, and due diligence has limited ability to set accurate synergy expectations (McKinsey, June 2010). In a 2015 survey, more than a third of respondents missed revenue goals after a merger (McKinsey, October 2017).

Sources

1. Commercial due diligence (Best-Practice Guideline 72) — ICAEW Corporate Finance Faculty (accessed 2026-10-26), 8 Sep 2025
2. Commercial due diligence: types, process, checklist — DealRoom (secondary; accessed 2026-10-26), 26 Oct 2026
3. Perspectives on merger integration: beyond risk avoidance — McKinsey & Company (accessed 2026-10-26), 1 Jun 2010
4. Focusing your M&A team on revenue growth — McKinsey & Company (accessed 2026-10-26), 16 Oct 2017