Identifying companies that are a good fit for acquisition involves several factors that must be carefully evaluated. Here are some key steps to consider when identifying companies fit for acquisition:
- Define your acquisition criteria: Before you start looking for companies to acquire, it’s important to define your acquisition criteria. This could include factors like the size of the company, its market position, the strength of its management team, its financial performance, and the strategic fit with your own business.
- Conduct market research: Research the market to identify potential targets that meet your acquisition criteria. This could involve analyzing industry reports, market trends, and other publicly available data to identify companies that are a good fit.
- Evaluate the target company’s financials: It’s important to evaluate its financial performance carefully. This could include analyzing its revenue, profit margins, cash flow, debt levels, and other financial metrics to determine its financial health.
- Evaluate the target company’s management team: The management team of the target company is a key factor in its success, so it’s important to evaluate their skills and experience. Look at their track record in managing the business, as well as their experience in the industry.
- Assess the strategic fit: Evaluate the strategic fit between your company and the target company. This could include analyzing their products and services, market position, customer base, and other factors to determine whether the acquisition would be a good fit for your business.
- Conduct due diligence: Once you have identified a potential acquisition target, it’s important to conduct due diligence to confirm the accuracy of the information provided by the company. This could involve reviewing financial statements, legal documents, and other relevant data to ensure no surprises after the acquisition.
- Negotiate the acquisition terms: Finally, negotiate the terms of the acquisition, including the purchase price, payment structure, and other key details. It’s important to work with experienced professionals, such as lawyers and investment bankers, to ensure that the deal is structured in a way that benefits both parties.
Whether or not to buy a company depends on its inherent value. Value is determined during preliminary business due diligence before the decision to buy is taken. Preliminary due diligence entails looking at the inherent business of the company. You look for answers to questions like:
- Is the business inherently profitable?
- Are competitors running a similar business profitably?
- What is the longevity of the business?
- What is the brand reputation of the company in the market?
- What is the level of debt and other liabilities of the company?
- Does the company possess land or other assets which can be stripped and sold?
I like to do business due diligence quietly and often incognito. Contact is made with the company only when the preliminary determination is made that the business can be viable or has bits and pieces that can be stripped and sold.
If you reach an agreement on terms, you conclude a term sheet. The formal due diligence process with accountants and other people follows. A decision to buy or not to buy is made coldly. It is a yes if you believe that a business can be turned around and converted into a profitable venture.
Further, if you believe you can strip the assets and make a bit of profit, the answer is again a yes. Otherwise, you move on and look for the right asset. An entrepreneur who observes self-discipline and makes the right call based on facts makes a profit. Those who believe too much in their gut feel do not last long in this business.