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Strategic Evaluation of Acquisition Targets – Part One

By Robert W. Bradford, President & CEO

This post is part of a series taken from Robert Bradford’s article Strategic Evaluation of Acquisition Targets published in Compass Points September 2008.  In this part we will introduce the series and discuss Market Impact.

Strategic Planning Expert
Robert W. Bradford

You are considering purchasing another company to accelerate the growth of your business. The company has $10 million in sales and shows a profit of $1 million. Physical assets and cash are pretty low — only $500,000 and the recent growth rate has been a modest, but consistent 4%. The owner wants $20 million for the company. Is this a good deal for you or not? Should you buy the company?

Obviously, from a purely financial perspective, the above deal doesn’t look particularly attractive. There are plenty of resources for evaluating the value of an acquisition target from a financial perspective. In other articles, we have examined the strategic reasons for pursuing an acquisition and factors which will make some targets more strategically attractive for you. In this article, we will take a quick look at the other strategic factors that may dramatically change your assessment of the value of an acquisition target.

There are four factors you will want to consider in evaluating an acquisition:

  1. Financial value
  2. Asset value to your company
  3. Possible resale value of the company and its assets
  4. Strategic impact on your company
    • Market impact
    • Technology impact
    • Human resource impact
    • Distribution impact
    • Supplier market impact

We will not spend much time on the assessment of the first three items, because they are well-addressed elsewhere. The fourth, strategic impact can most easily be assessed by deciding to treat the strategic impact as an element of financial value, asset value or resale value — but this requires making some very specific assumptions.

  1. Market impact

Market impact is the effect that combining your company with the target will have on market behaviors. For example, reducing the number of competitors may decrease price competition, increasing margins for the remaining competitors. A combined company may also generate higher value for customers by offering a broader product line, simplifying terms or raising the overall quality and service levels in the market. These will, in turn, enable the acquiring company to strategically shift the competitive dynamic so that market success is dictated by different strategic competencies.

In the next post in this series, we will discuss Technology impact, Human resource impact, Distribution impact and Supplier market impact.

To learn ways to take your strategic planning to the next level please listen to our webinar:  Why my strategic planning isn’t working.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

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