What Makes a Company a Good Acquisition?

The mergers and acquisitions market can be a tricky place to navigate –whichever side of the transaction that you are on. Between trying to find the right buyer or business to invest in, negotiating a price that both sides are satisfied with, and conducting the necessary due diligence, the process can be time-consuming and complex. This is why it is important to identify as soon as possible that the acquisition is a good one, otherwise you are sinking a lot of time and effort into a deal that will not succeed.

A question that we get asked a lot is ‘what makes a company a good acquisition?’ –here are our thoughts.

Great financials

We are not just talking about a high-profit margin with low overheads here –although that is obviously desirable. When we saygreat financials, we are referring to the quality of your actual financial reporting and documentation –clear, accurate, and well-organized financials mean that the due diligence phase (historically one of the longer phases of the M & A process) can be completed smoothly and without any misunderstandings or back-and-forth between buyer and seller.

It is not just about speeding up the process, however –having great finances makes the business look well managed and organized overall, which are attractive qualities in and of themselves.

Excellent Potential

It is a rare circumstance that leads to a company being bought with the intent of maintaining things exactly as they are. The vast majority of investors/business buyers are looking for an opportunity –they like what the target business is doing, but they want to be able to make it better. Whether that is through a mutually beneficial alignment with existing companies owned by the buyer, or whether it is an as-yet-untapped potential for growth, the potential for the business should be made as clear as possible.For sellers, this can mean drawing up detailed plans for growth. If you know of an upcoming change to the marketplace (competitor shutting up shop, customer base expanding through new property development, etc) then make this a key part of how you position the business for sale –not only will you attract more potential buyers, but you will be able to demand a higher price.

Accurate Valuation

A common reason for failed mergers and acquisition activity is an over-valuing of the business by the seller. This can be due to an emotional attachment to the company by the owner/operator, or simply because a professional, accurate valuation was never completed by the seller. It is not as simple as finding anequation online and applying some recent figures –an accurate business valuation takes into account every single aspect of the business: physical assets, stock, equipment, debts, warranties, contracts, similar business transactions, and any number of other factors.