List strategic criteria
Consider the various options you have for growing your company. Then, ask if you have the internal capability to create that growth. If you can’t manage it internally at a reasonable cost, an acquisition could be the right strategy.
The next step is to choose an acquisition target that will add the value you’ve identified. List strategic criteria the company should meet. Here are some important considerations.
- How will it fit into your overall business plan?
- Is the purchase price within your budget (including integration and financing costs)?
- Is the business in the right location?
- Do its employees have the capabilities you’re looking for?
- Does it possess intellectual property and technology you’re seeking?
- Does it engage in innovative practices?
- Does it have brand strength and a solid business reputation?
- Is the company culture a good fit with yours in terms of management style and relationships among employees, clients and suppliers?
The last criterion is sometimes overlooked, but it can often make or break an acquisition. It’s not uncommon for acquisitions to underperform because of a culture clash.
Include strategy specifics
Your criteria should also reflect any particularities of your acquisition strategy. These may include:
- Buying an underperforming business—You may decide to buy an underperforming or failing company for a bargain price and turn it around.
- Buying a competitor—This strategy can allow you to increase your market share, improve your profit margins, diversify and improve on the other company’s ideas.
- Buying a supplier or distribution channel—Such an acquisition can improve your company’s performance and cut down on delays. It may also result in increased buying power, which can lead to cost savings and operational efficiencies.
Be sure to consider how you will finance the purchase of a particular business. What percentage of the deal is the vendor willing to finance? What assets does the company have that you can pledge against a loan? Could you use mezzanine financing to complete the package?
It’s important to remain disciplined in sticking to your criteria and patient in your search. Businesses often make the mistake of getting caught up in the excitement of shopping for acquisitions, especially in a hot market where there are more buyers than sellers. That can lead them to getting sidetracked with a non-strategic acquisition—for example, one that’s available for a bargain.
Look closer at company culture
When looking at a business, you should go beyond financial and operational issues to ask other questions. Why is the owner selling? Is the business overly dependent on a few customers? Are important customers loyal to the current owner and likely to vanish when he or she is gone?
Take an even closer look at the company’s culture and how it will fit with your business and its strategy. Again, be disciplined if you identify difficulties, and don’t be afraid to walk away.