Going into a negotiation, the management team of a mid-sized company discussed a potential deal:
Business Development: If we can buy it for $68mm or less, it clears our hurdle rate.
Chief Strategy Officer: What’s our BATNA? [Best Alternative To a Negotiated Agreement]
Senior FP&A Analyst: If we pay $68mm, it reduces our enterprise value. We have to get it below $54mm to be a net positive.
Chief Strategy Officer: Why is that?
Senior FP&A Analyst: Paying any more than $54mm and using other resources on this project keeps us from doing a few other projects that are collectively worth more to us than this one.
This conversation happens all the time at companies that actively use portfolio management to aid their decision making.
Two or more companies could use the exact same forecasts and assumptions about an acquisition, but may still decide it is worth different amounts. That’s because the companies all have different alternatives. If they complete the acquisition, it will likely mean they cannot do other projects under consideration. And that’s because few companies have infinite resources, and doing Project A means you may not be able to move forward with Projects B and C.
The value of the npv10 solution is to very quickly evaluate your alternatives, recalculate all of the pertinent key performance indicators, all while achieving corporate goals within the given constraints.
Beyond the quick analysis, executive discussions can focus on relaxing constraints (perhaps by raising additional capital, or finding other necessary resources) to enable the firm to take on additional valuable projects. The software will show which KPIs are “bumping against the ceiling” and you can decide if they are “hard ceilings” or have some flexibility.
If you are frequently considering acquisitions or divestitures, and want to quickly determine how they impact your company, let us help model your business and its opportunities, and show you how to maximize your company’s value.