Growth Through Acquisitions – Plan for Success
Questions To Consider Before Acquiring a Business
by David K. Clark
Undertaking an acquisition can be a good way to grow your business, but to be successful, some preliminary homework is usually in order. A number of studies have publicized the low success rate of acquisitions but that doesn’t mean your efforts are doomed. Following a process which includes in depth evaluations of your business and potential targets can greatly increase the odds of success. Following is a starter list of questions to consider before undertaking an acquisition. To answer these questions, management should start by completing a SWOT (Strengths, Weaknesses, Opportunities, Threat) analysis.
- What are the risks of not doing anything differently – what does the next one to three year time horizon look like in the current state, financially and operationally for our business?
- One objective of an acquisition strategy is diversification, which is primarily to reduce risk. These risks could include things such as customer concentration, industry decline, competitive pricing/margin erosion, industry consolidation, global sourcing, changes in consumer/customer behavior, etc… What are the one or two greatest risks we are currently facing that could impact performance?
- What is a reasonable growth rate target and return on investment objective that would satisfy the shareholders?
- What are our operational strengths, and how could we leverage them in a merger and what industry knowledge and expertise would we bring to a related business?
- Is it possible to gain business with our current customer base by providing new products and services, and could these be acquired?
- How strong is our brand/trade name. Is this goodwill an important consideration in an acquisition?
- Can we create economies of scale with our fixed asset base and operational infrastructure, i.e. lower costs resulting from a combination?
- What are the capabilities of our management team to absorb and integrate another business ?
- What is our company culture and what types of cultures in a target would be compatible and allow us and the target to achieve our goals?
- How would we handle an acquisition outside of our region? Is that feasible, or should we stay in a certain geographic area?
- What size business would be appropriate to target and would deliver on our growth plans?
- What is our access to financing and how much debt are we willing to absorb.?
Addressing these questions will help answer the question whether an acquisition is appropriate and if so they will provide a solid foundation for identifying the key attributes of a desirable acquisition target. In a follow-up installment, we will discuss analysis of the potential targets.