Exit and Growth Strategies for Middle Market Businesses

What is Your Corporate Acquisition Criteria?

By Brian Ballo | Jul 28, 2008

Corporate Buyers Should Answer 5 Key Questions When Preparing a List of Acquisition Criteria

Corporate buyers appreciate that acquiring another company is an effective way of achieving growth, which can compliment organic growth. However, before proceeding with any acquisition process, research in the area of Pre-Acquisition Best Practices has shown that 5 key questions should be considered by acquirers.

By answering these fundamental questions, a corporate buyer is then more readily able to detail a List of Acquisition Criteria. In turn, the List of Acquisition Criteria shapes the buy-side mandate given to an investment bank, which will then proceed to systematically contact both sellers that are actively for sale, as well as the much larger group of off-market target sellers.

  • Acquisition Purpose. First, what is the purpose, motivation or intent that causes an acquirer to undertake buying another firm? Acquisitions are often employed by acquirers to achieve economies of scale, to expand existing product/service lines, or to penetrate additional markets. These goals are a reflection of the broader corporate strategy for how you want to grow your company.

  • Determining Fit. Second, what information needs to be obtained in order to make a precise evaluation of a target firm? Advisors use buyer due diligence checklists to ask for documents from the target seller, after the buyer signs a Confidentiality Agreement. However, proper analysis of this information is aimed at determining whether the target will integrate well with the acquirer, both from a “synergistic fit” and “operational fit”. Strategic fit is the degree to which the target firm complements the parent’s strategy and thus makes identifiable contributions to the financial and nonfinancial goals of the parent. Operational fit involves matching administrative systems, corporate cultures, and demographic characteristics.

  • Defining Value. Third, how would an acquisition create value? Value can be defined as the worth of an acquisition, resulting from the anticipated synergistic benefits of combining the acquirer and target company. Synergy will be realized when cash flow is increased, through either increased sales or reduced costs, which ultimately leads to an increase in shareholders’ wealth. In short, what cash flow metrics establish value?

  • Deal Pricing and Financing. Fourth, how is price determined, and how will the buyer fund a deal? Typically, multiples of EBITDA within the same industry, establish the benchmark for pricing a deal. However, a buyer also needs to define those aspects for which a premium above average industry multiples will be paid, or when the buyer will insist on a discount from those averages. Also, determining how you might fund a deal, and establishing your funding capacity, as evidenced by a letter from a debt or equity source, will strengthen an anticipated Letter of Intent to buy.

  • Approaching the Seller. Fifth, what approach to acquisition should be utilized? Approach is the variety of procedures used to persuade the target firm to accept and finalize an intended acquisition deal. A bidder’s acquisition approach includes the manner of acquisition (i.e., merger vs. tender offer), the method of payment (i.e., cash vs. stock), and the type of acquisition (i.e., related vs. unrelated acquisition). Advisors help buyers by conducting this process confidentially.

As a corporate buyer, summarizing your answers to these 5 questions in a List of Acquisition Criteria will establish the framework for evaluating whether an acquisition is a good deal. Detailing your Acquisition Criteria is also the first step towards enlisting qualified advisors to act as your outsourced acquisition team. Based on such well-defined acquisition criteria, investment bankers working on your behalf can then proceed to systematically qualify target sellers and initiate the due diligence process.

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