M&A Vocabulary – Experts explain: Sensitivity analysis

Sensitivity analysis is regularly used in various areas, including M&A transactions, particularly in connection with the analysis of business plans, which are often based on uncertain assumptions. By running through various sensitivities (e.g. changes in sales volumes, prices or margins), potential risks can be assessed and mitigated. This allows the transaction parties to focus on the most important factors, develop risk mitigation strategies and reflect any findings in the purchase price. For example, changes in sales forecasts, operating costs or costs of capital can be simulated in the present value of future cash flows. Sensitivity analysis is used by both the buyer and the seller. It is used by the seller to demonstrate the robustness of its business results, such as its revenue or EBITDA. Furthermore it is also used to maximise the value of assets being sold and to convince potential buyers of the attractiveness of the deal. The seller can build confidence by identifying key drivers and emphasising the robustness of the business model. On the buyer side, sensitivity analysis is primarily used as a tool to assess the viability of an investment and to estimate potential downside risks. In addition, the results provide implications for the determination of the purchase price in the transaction process. 

Sensitivity analysis is also an important tool in the area of financing. Financial institutions and investors often require detailed sensitivity analyses as part of the due diligence process to assess the viability of the transaction and the ability of debt repayment.

Scenario analysis goes one step further by analysing different combinations of key factors or input variables. The result is the identification of a wider range of possible outcomes. Scenarios may be based on different assumptions, events or trends affecting the future, such as changing market conditions, regulatory changes or technological advances. ​