Screening Acquisition Targets--Part II
President and CEO, CSSP, Inc.
In my last article, I briefly discussed the six key data points you want to evaluate in preliminary acquisition target screening. In this article, we will discuss how to use the acquisition screening data to narrow the field down to a manageable number of candidates.
Using page 2.1 (Potential Acquisition Worksheet), you should have already captured six data points about each possible target: Name, Sales, Ownership, Competency Enhancement, Asset Value and Probability of Success. If you have ten to twenty possible targets, you should first determine if any target on the list is financially impractical. As a general rule, you can assume that targets with Sales
above twice your own sales will be difficult to acquire. True, it's not impossible for a \"fish to swallow a whale\" -- but it's strategically much more prudent to set a price tag that you can reasonably handle -- and forgo looking at targets that will command more than this limit.
The next screen should come from a close look at Ownership
. Certain Ownership situations -- a family company going through a generational transition, a private equity-held company nearing the end of its term -- will be very likely to be for sale. Others -- a growing business with a younger entrepreneurial owner, for example -- will be less likely. Do not discard the unlikely sellers outright -- but be aware that the sale will likely not be as easy or as inexpensive as others will.
The next item to evaluate, Competency Enhancement
, is one of the most critical, and yet often overlooked. Simply put, strategic competency enhancement is the single best reason to make an acquisition -- and often the hardest element to evaluate properly. We need to make sure we evaluate strategic competency, and the effect of acquiring the target company, from two perspectives -- that of our company, and that of the target. In either perspective, there is a danger of overlooking damage to the two existing competencies that may be inherent in combining two dissimilar businesses. Do not let your desire to make the acquisition blind you to this reality -- merging two companies with dissimilar and incompatible strategic competencies may be the most disastrous strategic move anyone could make.
The second subjective item, Asset Value
, can make a target with a low competency-enhancement value attractive. Some targets will have assets like real estate, brands, intellectual property or distribution networks that would add value to your company even if you dismantled the rest of the target company's operation. Ideally, you will find a target with both high competency enhancement and asset values, but there is a price at which simply acquiring certain assets may make sense.
Finally, the Probability of Success
should be considered. This probability may actually be affected by a number of factors, such as culture, ownership involvement, and willingness of customers to stick with the companies involved through a merger. There is some correlation between competency enhancement, asset value, and probability of success, as well, so this item may have slight redundancy. Clearly, high probability acquisitions should be considered ahead of low probability ones.
As a general rule, the screening criteria have been listed in order of priority. That is, you should screen the unaffordable sales first, then the unlikely ones, followed by those with low competency enhancement, low asset value, and low probability of success. Some people will choose to put probability of success higher, but your company's strategy will be better served if you pursue lower probability targets that have high competency enhancement, for example. Going after the high probability targets first is a bit like picking fruit off the ground rather than the tree -- it's easier to get, but it's also more likely to be rotten.
Robert Bradford is President and CEO at the Center for Simplified Strategic Planning. He can be reached at
© Copyright 2014 by Center for Simplified Strategic Planning, Inc. Ann Arbor, MI -- Reprint permission granted with full attribution.