Approval Gates & Investment Process

A structured stage-gate approval process ensures disciplined M&A decision-making, prevents costly mistakes, and enables fast execution on the right deals. Clear gates define when to advance, when to kill, and who approves each stage.

Why Approval Gates Matter

Without Clear Gates:

• ❌ Deals linger in "maybe" purgatory for months
• ❌ Team spends resources on low-probability opportunities
• ❌ Leadership surprised by deal announcements or sudden requests
• ❌ Inconsistent approval criteria (depends on who's sponsoring)
• ❌ Failed deals after months of work due to lack of early alignment

With Structured Gates:

• ✅ Fast decisions on go/no-go at each stage
• ✅ Resources focused on highest-probability deals
• ✅ Leadership has visibility and control
• ✅ Consistent, objective criteria applied to all deals
• ✅ Early kills save time and money

The Six-Gate M&A Framework

┌────────┐   ┌────────┐   ┌────────┐   ┌────────┐   ┌────────┐   ┌────────┐   ┌────────┐
│ SCREEN │ → │EXPLORE │ → │  LOI   │ → │DILIGENCE│→│ BINDING│ → │  CLOSE │ → │ POST-  │
│        │   │        │   │        │   │        │   │ OFFER  │   │        │   │ CLOSE  │
└────────┘   └────────┘   └────────┘   └────────┘   └────────┘   └────────┘   └────────┘
    ↓            ↓            ↓            ↓            ↓            ↓            ↓
  Gate 1       Gate 2       Gate 3       Gate 4       Gate 5       Gate 6     Gate 7

APPROVER:
VP CorpDev   SVP/CFO    Investment    Investment     Board      CFO/GC    Steering
                        Committee     Committee    (>threshold)            Committee

Gate 1: Screen

Purpose: Initial evaluation - is this worth exploring?

Trigger: Inbound opportunity or outbound target identified

Approval: VP Corporate Development

Decision Time: 1-3 days

Key Questions:

• Does this fit our M&A strategy?
• Is size range appropriate ($X-$Y revenue/valuation)?
• Are there any fatal flaws?
• Is seller potentially serious?

Gate 1 Deliverables

One-Page Deal Summary

DEAL SUMMARY: [Company Name]

OVERVIEW:
• Company: [Name], [sector], [geography]
• Revenue: $[X]M (LTM), growing [X]% YoY
• EBITDA: $[X]M ([X]% margin)
• Employees: [#]
• Valuation Expectations: $[X]-$[X]M ([X-X]x Revenue)

STRATEGIC FIT:
• Fit: [High/Medium/Low]
• Rationale: [1-2 sentences on why this fits strategy]
• Priority Area: [Which strategic priority does this address?]

PRELIMINARY FINANCIALS:
• Revenue multiple: [X.X]x (vs. comps [X.X-X.X]x)
• EBITDA multiple: [X.X]x (vs. comps [X.X-X.X]x)
• Quick IRR estimate: [X]% (if paying asking price)

SELLER MOTIVATION:
• Source: [Inbound via banker / our outreach / board intro]
• Timing: [Seller timeline or urgency]
• Process: [Exclusive / auction / no process yet]

RED FLAGS / CONCERNS:
• [List any immediate concerns]

RECOMMENDATION: [Proceed to Gate 2 / Pass]

Gate 1 Decision Criteria

Decision:

• Advance to Gate 2: Strong fit, worth deeper exploration
• Pass/Kill: Poor fit, valuation unrealistic, or fatal flaws

Gate 2: Explore

Purpose: Initial valuation and fit assessment - worth pursuing LOI?

Trigger: Passed Gate 1, received initial information

Approval: SVP/CFO

Decision Time: 1-2 weeks

Key Questions:

• What's our valuation range?
• Can we get to a price both sides accept?
• Are there any diligence red flags?
• Do we have internal support for this deal?

Gate 2 Deliverables

Initial Valuation Memo (3-5 pages)

Contents:

1. Deal Overview - Company description, investment highlights
2. Strategic Rationale - Why this deal, how it fits, strategic value
3. Financial Overview - Historical performance, management projections
4. Valuation Analysis - DCF, comps, precedents → Fair value range
5. Preliminary Synergies - High-level synergy estimate ($X-$Y million)
6. Initial Concerns - Red flags from early review
7. Proposed Next Steps - LOI terms, timeline, diligence approach
8. Recommendation - Proceed to LOI at $X-$Y valuation

Valuation Output:

Recommended Offer: $X (within fair value range)

Gate 2 Decision Criteria

Advance to Gate 3 (LOI) If:

• ✅ Valuation range is acceptable (gap <20%)
• ✅ Strategic fit confirmed
• ✅ No fatal flaws in preliminary review
• ✅ Internal sponsor supportive
• ✅ Seller appears serious

Kill If:

• ❌ Valuation gap >30% and unlikely to close
• ❌ Strategic fit weaker than initially thought
• ❌ Major red flags (customer concentration, declining business, accounting issues)
• ❌ Lack of internal support

Gate 3: LOI (Letter of Intent)

Purpose: Authorize signing non-binding letter of intent

Trigger: Gate 2 approved, ready to submit offer

Approval: Investment Committee (IC)

Decision Time: IC meeting (typically 2-3 hours)

Key Questions:

• Should we pursue this acquisition?
• Is the proposed valuation and deal structure appropriate?
• Do returns meet our hurdle rate?
• What are key risks and how do we mitigate?

Gate 3 Deliverables

Full IC Presentation (20-25 slides)

Deck Structure:

1. Executive Summary
2. Strategic Rationale (3-4 slides)
3. Target Overview (2-3 slides)
4. Market Opportunity (2 slides)
5. Financial Analysis (4-5 slides)
6. Synergies & Value Creation (2-3 slides)
7. Integration Approach (1-2 slides)
8. Risk Assessment (2 slides)
9. Recommendation (1 slide)
10. Appendix (backup materials)

LOI Terms Sheet

Key Terms:

• Purchase Price: $X million
• Structure: Cash / stock / combination
• Exclusivity: 60-90 days
• Breakup Fee: X% (if applicable)
• Contingencies: Financing, board approval, regulatory
• Timeline: Close within X months
• Due Diligence: Access to data room, management, customers

→ See IC Presentation Guide for detailed deck template

Gate 3 Decision Criteria

IC Approves LOI If:

• ✅ Strategic fit: Aligns with M&A priorities
• ✅ Returns: Base case IRR >15% (or company hurdle)
• ✅ Valuation: Fair value based on multiple methods
• ✅ Downside: Acceptable even in pessimistic scenario
• ✅ Executable: Financing available, integration feasible

IC Decision Options:

• Approve: Sign LOI as proposed
• Approve with Conditions: e.g., "Max $480M, not $500M" or "Subject to confirming customer concentration"
• Defer: Need more information, return in 2 weeks
• Decline: Do not proceed

Gate 4: Proceed to Binding Offer (Post-Diligence)

Purpose: Confirm deal thesis post-diligence, authorize binding offer

Trigger: 60-90 days of diligence complete

Approval: Investment Committee (IC)

Decision Time: IC meeting (2-3 hours)

Key Questions:

• Did diligence confirm or refute our thesis?
• Are findings within acceptable range?
• Does valuation need adjustment?
• Should we proceed to binding offer?

Gate 4 Deliverables

Diligence Findings Report (IC Update)

Contents:

1. Executive Summary - Key findings, recommendation
2. Diligence Overview - What was reviewed (financial, legal, IT, commercial, HR)
3. Key Findings - Positive findings and red flags
4. Valuation Update - Adjusted based on diligence
5. Updated Returns - Revised IRR, NPV based on new information
6. Risk Assessment - Material risks discovered and mitigations
7. Final Deal Terms - Any changes to structure or price
8. Integration Plan - Refined integration approach and costs
9. Recommendation - Proceed, renegotiate, or walk

Diligence Summary Table:

Gate 4 Decision Criteria

Proceed to Binding Offer If:

• ✅ No fatal flaws discovered
• ✅ IRR still meets hurdle (adjusted for findings)
• ✅ Risks are manageable with mitigations
• ✅ Price adjustments (if needed) are acceptable

Walk Away If:

• ❌ Material misrepresentation discovered
• ❌ IRR falls below hurdle even with price reduction
• ❌ Unacceptable risks (customer concentration, regulatory, technology)
• ❌ Integration complexity beyond team's capability

Renegotiate If:

• ⚠️ Findings justify price reduction
• ⚠️ Need additional protections (escrows, earnouts, reps & warranties)
• ⚠️ Timeline needs extension

Gate 5: Definitive Agreement / Binding Offer

Purpose: Final approval to sign merger/purchase agreement

Trigger: Negotiated definitive agreement ready to sign

Approval: Board of Directors (if above threshold, e.g., >$100M or >10% of market cap)

Decision Time: Board meeting or special session

Key Questions:

• Are final terms acceptable?
• Has anything material changed since Gate 4?
• Do we have financing committed?
• Should we execute this transaction?

Gate 5 Deliverables

Board Approval Memo

Contents:

1. Executive Summary - Deal overview and recommendation
2. Strategic Rationale - Why this acquisition
3. Financial Summary - Valuation, returns, pro forma impact
4. Final Terms - Purchase price, structure, key provisions
5. Financing Plan - Sources & uses, credit impact
6. Risks - Material risks and mitigations
7. Integration - High-level integration plan
8. Approvals Required - Regulatory (HSR, etc.), shareholder (if needed)
9. Timeline to Close - Expected closing date
10. Recommendation - Approve execution of definitive agreement

Gate 5 Decision Criteria

Board Approves If:

• ✅ Terms consistent with IC approval
• ✅ No material adverse changes
• ✅ Financing committed
• ✅ Regulatory path clear
• ✅ Management and board aligned

Board May Decline If:

• ❌ Terms worse than IC approval
• ❌ Material changes in target's business
• ❌ Market conditions changed significantly
• ❌ Better alternative use of capital emerged

Gate 6: Close

Purpose: Final sign-off to close transaction

Trigger: All closing conditions satisfied

Approval: CFO and General Counsel

Decision Time: Same day (final check)

Key Questions:

• Are all closing conditions satisfied?
• Any last-minute issues?
• Is Day 1 integration plan ready?
• Authorization to wire funds?

Gate 6 Deliverables

Closing Checklist

Required Items:

• All regulatory approvals obtained (HSR, foreign, industry-specific)
• Financing documents executed, funds available
• Third-party consents obtained (customers, vendors, landlords)
• Reps and warranties accurate as of closing
• No material adverse change (MAC) occurred
• Board resolutions adopted
• Purchase price adjustments finalized
• Escrow and holdback agreements executed
• Day 1 communications ready (employees, customers, press release)
• Day 1 integration plan ready to execute

Closing Authorization:

• CFO: Financial review complete, funds released ✓
• General Counsel: Legal review complete, documents signed ✓
• CEO: Final approval to close ✓

Gate 7: Post-Close Review (30/60/90 Days)

Purpose: Track integration and synergy capture

Trigger: 30, 60, and 90 days post-close

Approval: Integration Steering Committee

Key Questions:

• Is integration proceeding on plan?
• Are synergies being captured?
• Any major issues requiring escalation?
• Adjustments needed to plan?

Gate 7 Deliverables

Integration Scorecard (30/60/90 days)

Metrics:

→ See Value Creation Planning for post-close tracking

Approval Thresholds by Deal Size

Small Deals (<$25M)

Rationale: Smaller deals don't require full IC/Board process, streamlined for speed

Medium Deals ($25-100M)

Rationale: Full IC process but board approval not required

Large Deals (>$100M or >10% market cap)

Rationale: Board involvement for material transactions

Stage-Gate Best Practices

1. Define Clear Criteria

Don't: "We'll know it when we see it"

Do: Objective criteria for each gate (strategic fit score, IRR threshold, deal size, customer concentration limits)

2. Set SLAs (Service Level Agreements)

Gate 1: 1-3 days
Gate 2: 1-2 weeks
Gate 3: 2-4 weeks (IC schedule)
Gate 4: 2 weeks post-DD
Gate 5: 2-4 weeks (board schedule)

Avoid: Deals sitting in limbo without decisions

3. Document Decisions

Required: Written record of gate decisions, rationale, conditions, approvals

Why: Accountability, consistency, post-deal review

4. Kill Fast

Philosophy: "Quick no is better than slow maybe"

Target: Kill 50-70% of opportunities before Gate 3 (LOI)

Why: Focus resources on highest-probability deals

5. Maintain Flexibility

Don't: Rigid process that slows down competitive situations

Do: Ability to collapse gates or accelerate for time-sensitive deals (with appropriate approval)

Common Approval Gate Mistakes

❌ Mistake 1: No Clear Gates

Problem: Deals advance without formal approval, leadership surprised

Solution: Define gates, approvers, criteria in written M&A policy

❌ Mistake 2: Gates Without Teeth

Problem: Gates are rubber stamps, deals never killed

Solution: Enforce criteria, empower approvers to say no, celebrate kills

❌ Mistake 3: Slow Decision-Making

Problem: Deals sit for weeks awaiting approvals, lose competitive opportunities

Solution: SLAs for each gate, calendar IC meetings monthly, pre-wire leadership

❌ Mistake 4: Inconsistent Criteria

Problem: Strategic deal gets approved at 12% IRR, financial deal declined at 17% IRR

Solution: Document decision rationale, review past approvals for consistency

❌ Mistake 5: Skipping Gates

Problem: Jump from initial discussion to LOI without proper evaluation

Solution: Enforce process, even for "hot" deals (compress timeline but don't skip gates)

Key Takeaways

1. Stage-gates prevent costly mistakes - structured process ensures disciplined decisions
2. Six core gates - Screen, Explore, LOI, Diligence, Binding Offer, Close
3. Clear approvers - VP for screen, SVP/CFO for explore, IC for LOI/binding, Board for >threshold
4. Objective criteria - strategic fit, IRR threshold, valuation range, risk tolerance
5. Kill fast - 50-70% of deals should be killed before LOI to focus resources
6. Set SLAs - each gate should have decision timeline (1 day to 4 weeks)
7. Document everything - decisions, rationale, approvals for accountability
8. Flexibility when needed - compress for competitive situations but don't skip gates

Related Resources

• M&A Operations Overview - Complete operations framework
• Meeting Cadence & Governance - IC and board meeting processes
• IC Presentation Guide - Investment Committee presentations
• Business Case Development - Financial analysis for approval
• Due Diligence in M&A - Comprehensive diligence guide