Developing Acquisition Criteria: A Checklist for Identifying Target Companies

Youíve made the decision: You want to buy a business. Before you go any further, it is essential to describe what youíre looking for carefully enough so that your search efforts are well directed but not so narrowly that you overlook qualified targets.

Rationale for Creating a Checklist

To this end, you will want to define both the ideal and the essential characteristics of your target business. This definition gives those making the acquisition decision (the stockholders, professional advisors, board of directors, etc.) a common blueprint for finding and evaluating acquisition candidates.

Developing a checklist of acquisition criteria can also reaffirm your goals or bring a part of your strategic plan more clearly into focus. You may also discover something about your business or goals you may not have known otherwise.

For example, letís assume one of your acquisition strategies is to acquire strong management. As you refine this objective you will probably become aware of previously unexamined strengths or weaknesses. You may realize a division head known for her rapport with clients also has strong team-building skills.

As your advisors contact potential sellers, they will need to provide information about what youíre looking for, along with a description of your company. The acquisition criteria you develop will form the core of this document.

Developing the Checklist

The first step in developing acquisition criteria is examining your strengths and weaknesses. While this step may seem obvious, many buyers fail to examine themselves adequately and consequently develop flawed acquisition criteria.

Next, review your strategic plan. Where do you see your company in three years? In five years? In ten? What will it take to get there? If you donít have a strategic plan, prepare one. Some business owners are hesitant to articulate a strategic plan because they feel too constrained by it. However, remember that a good strategic plan evolves as the company, industry and overall economic climates change.

After you have a realistic and complete picture of your business and a vision of its future, list the qualities youíre seeking in an acquisition candidate. No candidate will have every quality you seek, but make your checklist to be as comprehensive as possible. Some of the items such as the range of acceptable purchase prices will be requirements. Other like the acquisition of capital assets may be attractive but not essential.

Facts to Consider

Many, but not all, of these qualities will be specific to the industry. While each acquisition is characterized by a particular set of needs, we have prepared some guidelines to help you develop yours:

  • Industry and type of company. Are you looking for a business similar to yours, or do you want to diversify?

  • Level of sales and profit margin. Do you want a business with smaller volume and a higher margin? Would you consider a company with a higher sales volume than yours?

  • Financial strength. Does the company have undervalued assets? Are there inventories that can be used as collateral for financing? How much preacquisition leverage can you accept?

  • Geographic location. Where do you want to buy? Is that the only acceptable location? Will any efficiencies of scale materialize only if the target is within a certain area?

  • Purchase price, financing terms. How much can you pay? Do you need seller financing? Are you looking for an earnout? What financing resources will you use? How much value will the acquisition create in the eyes of the lender?

  • Management strengths and weaknesses. Can your current management assume responsibility for the targetís operation? Will you need to retain existing management after the acquisition? Are there specific management strengths you need to complement your business?

  • Collective bargaining agreements. Would this acquisition jeopardize your relationship with a labor union? Will any strain created be healed by the time you renegotiate the agreement?

  • Market and market strategy. Is the acquisition designed to increase your market share? Is there a particular segment of the market you want to capture? Do you want to diversify your market strategies or expand your market research?

  • Number and strength of competitors. If the acquisition is for diversification, who are the targetís competitors? Are they new to the market? Are they gaining or losing market share?

  • History and reputation. Is the Acquisition candidate a family business? Will it be difficult to persuade the owner(s) to sell or the key employees to remain? Are you looking for a business with a strong reputation for high quality? Do you need name recognition?

  • Property, plant and equipment. Do you have idle facilities? If so, are you planning to acquire targets and liquidate the property, plant and/or equipment to finance the acquisition? Has the equipment been well maintained? Is it paid for?

  • Distribution networks. Is this acquisition designed to increase your distribution networks? Do your networks and those of your target complement each other? Can you combine networks to lower distribution costs?

  • Operational efficiency. Are you looking for ways to increase efficiency in an area like order fulfillment? Do you have a highly efficient operation you could export to the target?

  • Liability issues. How will the acquisition affect your product liability insurance? Are there proposed changes in safety or environmental regulations that affect your industry? Will the target have difficulty complying? Can the target help you comply with new regulations?

  • Trademarks, patents or proprietary technology. Do you want to acquire trademarks or patents to increase the price you can charge for your products or to increase your market share? Do you have proprietary technology that would streamline the targetís operations or provide a low-cost improvement in its product quality?

  • Research and development (R&D). Do you want to spread the cost of the R&D investment over a broader product or earnings base? Are you looking for new developments?

The successful acquisition begins with a concrete description of its purpose and a flexible yardstick with which to judge potential candidates. These questions can help you develop an acquisition checklist that will improve your focus. If you are planning an acquisition, call us early in the process. We can help you develop your acquisition criteria, identify potential targets and investigate their suitability.