Pursuing a new acquisition can be a quick way to grow the core business or an existing investment platform.
However, the process can also be lengthy, expensive and a distraction from running the existing business.
Investors or corporates looking to acquire a business should ask themselves a few key questions before investing resources and going deep with specific Targets.
Here are a few key areas I’d recommend starting with.
Note – this is not meant to replace comprehensive due diligence, which will come later in the process. These are meant to be themes to cover in initial calls during the business development or introductory phase, BEFORE heading into a formal process.
1) WHY ACQUIRE THIS PARTICULAR BUSINESS, AND WHY NOW?
What is the size of the overall market and what is the market share of the specific company?
What makes the business unique (i.e. what is its differentiation in the market)?
Why is this company in specific positioned to grow faster / better than competitors?
Does the business have any cyclicality (i.e. exposure to overall market conditions) or seasonality (i.e. growth and profitability across the year)
2) DOES THE BUSINESS FIT WITH OUR CURRENT GROWTH STRATEGY?
What is our (acquirer’s) current growth strategy, and how does this acquisition fit into that strategy?
Can we get better returns by pursuing our organic growth strategy vs. making this acquisition?
Do we have the cash and debt/equity capacity to do this deal? If not, how easy is it to raise the capital to do the deal?
What will this do to our overall portfolio (of business lines or segments) related to revenue growth, profitability, and cash flow generation?
What synergies are likely to exist?
3) WHAT ISSUES COULD COME UP DURING DUE DILIGENCE THAT WE SHOULD BE PREPARED FOR?
Note: Several more detailed questions, across multiple functional areas, should be asked during due diligence, but acquirers can glean high-level answers to these questions over a couple of calls.
Financial – does the Target have audited financials, or has a QoE (Quality of Earnings) analysis been done?
Regulatory – are there any constraints with us competing in certain markets? Are there regulatory body approvals we need to obtain before closing the deal?
Management team – Do we already know the management team well? Will the culture be a fit?
4) HOW WILL WE OPERATE THE BUSINESS?
Who (from the acquirer side) will own and underwrite the business case for the deal? Do we have an internal sponsor?
Do our management and functional teams have the bandwidth to get the deal done and run the new business? Will it distract our management team from our current operations?
Will we keep the business as a stand-alone entity or fully integrate it with our core business?
5) HOW WILL THE PROCESS PLAY OUT?
How did we learn about this specific Target? Are they running a broader process or are we able to have an exclusive conversation with them?
Who are the other competitors who are interested in this business?
How long do we anticipate this process playing out?
Are we prepared to invest the resources (time, mind-share and external advisory) to do this deal?
Taking a disciplined approach to covering the above areas will help
fill the pipeline with better deals and
reduce wasteful spend of time, dollars and effort months later into the process