What the model could not price

The decision as it arrived

The deal belonged to the CEO. He had found it and argued it past a committee that had turned down his last two.

His company makes precision components for equipment builders. A private equity firm owns it, and revenue sits under $100m. The target was a family-held competitor of 40 years, at $34m. Advisors checked its history and found nothing wrong. The deal team valued the savings from combining the two companies at $11m. Four weeks from signing he called Ammentic, because he was arguing harder than the facts required.

The Read

Ammara puts the same question to people outside the deal team, because a deal team tests the deal and not the market it lands in. Here it went to the four regional sales leaders. If we bought this company, which of our customers would push us on price?

All four named the same account in under 10 seconds. It was the company’s second-largest customer and the target’s largest. Ammara set the two customer lists side by side, and nine names appeared on both. The model held all nine at today’s prices.

The Pressure Test

Ammara built the room around the one voice the company had no way to hear.

The customer’s.

One operator had run purchasing at an equipment builder for 11 years. When two of his suppliers merged, he combined the contracts and asked for one rate on the whole volume. In all that time, every merged supplier he dealt with came down on price.

The second had bought a competitor with an overlapping customer list and kept every shared account. Fourteen months later he was doing the same work for 8% less, and the customers who left had been the cheaper problem. Then they did the math the model had skipped. 8% off those nine accounts costs $19m in value, against savings worth $11m.

The Action Brief

Commit with conditions, and the conditions were about the number rather than the target. Reprice the nine shared accounts at the rate a combined supplier gets rather than the rate they pay today, then take the deal back to committee. If the corrected case only works with less debt, the owners decide before signing whether to fund the difference.

The model priced the risk that customers would leave. It did not price the risk that they would stay.

Where it landed

At the debrief he said the deal closed nine weeks late and lower, after the owners put in $4m more. Six of the nine accounts asked for a new rate inside the first year, and he had his answer ready.

His sales leaders knew which customer would move. Ammara put that in front of two people who could price it.