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business acquisition direction

The Anatomy of an Acquisition: Pre-Acquisition

Nine out of ten people who begin the search for a business to buy never complete a transaction. In fact, the average buyer gives up after conducting a search for 18 months. Growing your business through acquisition can be both risky and rewarding. This blog series is intended to highlight important steps that should be followed before, during and after an acquisition. Our first blog focuses on a critical stage of the process: pre-acquisition strategy.

As a company owner or investor, you have made the decision to grow through acquisition. Before traveling down this complicated path, you need to answer some important questions:

  • Is this your best option for growth?
  • What is you acquisition capacity?
  • What are your corporate capabilities and weaknesses?
  • Do you want to add to your current type of business or add a new, complementary piece to your existing company?
  • What geographic considerations make sense to you?

The trickiest part of buying a business may be finding a business to buy. There are two types of buyers: strategic and financial. Strategic buyers are in the same business space and want to expand geographically or absorb a new technology. A financial buyer looks to get into a new business, using his or her own means to take on a new venture, such as private equity groups. The first step is to develop your strategy.

Develop a sound acquisition strategy

Many individuals don’t identify what types of business are right for them before searching for a company to buy. We worked with one young protégé who found himself at the helm of his business when the owner suddenly passed away. He decided he wanted to acquire a business; we stopped him and asked about his strategy. It turned out he had no plan, a sure bet for high risk, frustration, wasted time and ultimately, failure.
Acquiring a company is very similar to starting a business; you must have a business plan in place. You must develop a focused acquisition strategy and detailed acquisition criteria, including:

  • Industry: What is your business goal?
  • Revenue range: what is the amount you’re willing to invest/risk?
  • Range of target’s earnings before interest, taxes, depreciation and amortization (EBITDA)
  • Geography
  • Financing: Examine debt and/or equity channels available for financing Acquiring a company is very similar to starting a business; you must have a business plan in place.

It’s important to screen companies by developing a preliminary valuation model that looks at pro-forma earnings and cash flow as well as valuation and pricing, and a preliminary purchase price allocation. You must also conduct a preliminary commercial and financial review to look at business and company fit, and financial and tax structuring. Once you have a plan in place, you can begin assessing acquisition targets.

To continue reading about how to get the most acquiring a business, click here and download our free e-book, The Anatomy of an Acquisition.


Anatomy of an Acquisition E-book

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