If You Acquire, What’s the Right Target? What’s the Right Price?
10 Questions for inbound U.S. investors
Question 3 - If you acquire, what’s the right target? What’s the right price?
The first decision in an acquisition can be the most important: whom to acquire. Going down a road after the wrong target can be a significant drain on organizational resources even if a deal never takes place. If you do commit, a false step can stick with you for a long time.
Even worse, you may miss a universe of opportunities that were closer fits in the first place.
Start by getting your senior team aligned on the strategic criteria that matter most to you. Then develop a long list of relevant prospects and filter that list to create a short list of priority targets. That sounds easy, but those filters are choices that represent your strategy. At the outset, there’s little risk in considering too many targets.
Of course, the often most important near-term criterion is the price you’ll pay. Whether financed by cash or leverage, it should compare favorably to your anticipated return. When operating across borders, currency questions apply at the time of sale and later on when you’ll be trying to realize the value you sought in the first place.
It’s important to treat price and strategy as related elements.
Due diligence is critical, and your CFO will be at center stage – not only to help analyze the assumptions behind the initial transaction but also to help preserve and create value as the new entity moves forward. A “good” price for an investment that doesn’t advance your enterprise goals may turn out to be wasted money and a distraction from your strategy.
Questions behind the questions
- What are your chief acquisition criteria:
- Sustained earnings
- Presence in a certain market or geography
- Ownership of intellectual property
- New products, or something else?
- What are the specific deal issues that can have the biggest impact on valuation and return?
- Will the target require a cash infusion to operate even after you’ve paid to own it? Will that add to your debt load?
- Who else is competing to acquire your target? Do you have alternatives?
- What cultural issues will influence your post-merger operations?
- Are your accountants and theirs speaking the same language?
- What do you know about the people behind the brand you’re thinking of acquiring?
Do it now
Your senior team should be aligned on strategic priorities for M&A. Write down five criteria your acquisition should satisfy to be worthwhile in your eyes. Then write down five deal breakers that may likely disqualify a target, no matter how attractive in other ways.
The first decision in an acquisition can be the most important: whom to acquire…and it’s important to treat price and strategy as related elements.
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