How to Evaluate
an M&A Deal

Before You Start

• You need CEO or COO role access (M&A is restricted by default).
• Have the target company's financial information ready: revenue, gross margin, EBITDA, and ideally 2 years of historical data plus management projections.
• Know the proposed purchase price, debt structure (unitranche vs. traditional), and any earnout terms.
• Understand your company's current debt position (the system reads this automatically from your debt schedule).

Step 1—Navigate to M&A

From the main navigation, select M&A. You'll work through the tabs roughly in order:

Step 2—Create a Deal

1. Enter a Deal ID (short identifier, e.g., "meridian") and Deal Name.
2. Enter the target company name and select the close date (year and month).
3. Choose the Debt Structure: Unitranche (single blended loan, simpler) or Traditional (senior term loan + sub debt + revolver, potentially cheaper blended rate).
4. Enter the purchase price and click Create Deal.

The system automatically seeds 7 years of target financial placeholders (2 historical + close year + 4 projection years), default debt instruments based on your structure choice, and a Base Case scenario.

Step 3—Configure Deal Terms

On the Deal Setup tab:

Core Terms

Seller Notes & Equity Rollover

Earnout Configuration

If the deal includes an earnout, enter the total earnout pool and define up to 5 measurement periods. For each period:

How the earnout calculates:

If Target GP < Threshold:  Payment = $0
If Target GP ≥ Target:     Payment = Base Amount (100%)
If in between:             Payment = Base × (GP − Threshold) / (Target − Threshold)

Example: $1M base, $8M threshold, $10M target
  Target GP = $7M  → $0 (below threshold)
  Target GP = $9M  → $1M × ($9M−$8M) / ($10M−$8M) = $500K (50%)
  Target GP = $10M → $1M (100%)

Step 4—Enter Target Financials

On the Target Financials tab, enter 7 years of data:

Use audited financials or quality of earnings numbers for historical years. For projection years, use management projections adjusted for your diligence findings.

Step 5—Structure the Financing

On the Financing tab, configure the debt instruments that fund the acquisition. The tab first shows your existing debt at close (read-only)—the acquisition lender must provide enough to retire this AND fund the purchase price.

Instrument Configuration

For each instrument, enter a mandatory amortization schedule—the percentage of original principal required each year. Typical for GovCon acquisitions:

Year 1: 2%   Year 2: 5%   Year 3: 10%   Year 4: 10%   Year 5: 100% (balloon)

Step 6—Verify Sources & Uses

Switch to Sources & Uses and click Recompute Sources & Uses.

Uses: Cash to Seller, Retire existing bank debt (always retired at close), Transaction Expenses, and any notes flagged for retirement.

Sources: Seller Notes, Target Equity Rollover, each debt instrument's principal, and the plug instrument (auto-sized).

The system confirms Sources = Uses with a green checkmark. Below the waterfall, transaction multiples are shown:

Step 7—Read the Deal Summary

The Deal Summary tab is the results dashboard—where all the modeling comes together.

Hero Metrics

The Cash Flow Waterfall

The most important table for understanding deal viability:

Combined Adj. EBITDA          $12,500K
Less: Cash Interest           ($2,100K)
Less: Taxes                   ($1,800K)
Less: CapEx                     ($250K)
Less: NWC Change                ($150K)
──────────────────────────────────────
FCF BEFORE DEBT SERVICE        $8,200K   ← Can you pay your debts?

Less: Mandatory Amortization  ($1,500K)
Less: Earnout Payment           ($750K)
──────────────────────────────────────
FCF AFTER DEBT SERVICE         $5,950K   ← What's left for the equity

Credit Statistics & Covenant Compliance

Year-by-year covenant testing for Senior Bank Leverage and FCCR. The leverage arc tells the story: in a healthy deal, leverage starts high (4–5x at close) and drops steadily. By Year 5 it should be 2–3x. If leverage stays flat or increases, the target isn't growing as expected.

Pro Forma Valuation (MOIC)

Combined Adj. EBITDA (Year 5)     $18,500K
× Exit Multiple                         7.0x
= Enterprise Value               $129,500K

Less: All Debt                   ($18,700K)
────────────────────────────────────────────
Equity Value                     $110,800K

Cash MOIC:  3.2x  (Equity Value / Purchase Price)
Total MOIC: 2.8x  (Equity Value / (Purchase Price + Earnout))

Step 8—Configure Covenants and Exit Multiples

On the Covenant & Valuation tab, set per-year covenant thresholds:

Step 9—Run Scenarios

On the Scenarios tab, create performance variants:

Step 10—Multi-Deal Evaluation

If you're evaluating multiple acquisitions simultaneously, create an Evaluation Config: select 2+ deals, set a synchronized close date, configure combined debt instruments, and set combined covenant thresholds.

Key M&A Concepts

Leverage Multiple

Leverage = Total Funded Debt / Adj. EBITDA

In GovCon, 4–6x is typical for platform acquisitions; 3–4x for tuck-ins. The leverage arc should decline from ~5x at close to ~2.5x by Year 5 through debt amortization and EBITDA growth.

FCCR (Fixed Charge Coverage Ratio)

FCCR = (EBITDA − Taxes) / (Interest + Mandatory Amort + Earnout + CapEx)

For every dollar of fixed obligations, how many dollars of cash flow do you generate? 1.2x minimum is standard—below that, you can't reliably service your debt.

PIK Interest

Payment-in-kind interest accrues and adds to the loan balance instead of requiring cash payment. This preserves cash flow in early years, but the balance grows. At maturity, you owe more than you borrowed.

Common Questions