A company can be profitable, well known, and available at a reasonable price while still being the wrong acquisition.
The buyer must be able to understand the business, support its next stage, and accept the risks that come with ownership.
For a family-led holding company, the investment case often extends beyond a short holding period. The company must be capable of producing value under responsible ownership over time.
Real customer demand
The company should solve a clear problem for identifiable customers.
Useful questions include:
- Why do customers buy?
- Why do they remain?
- What alternatives exist?
- How sensitive is demand to price?
- Is demand dependent on temporary conditions?
- Does the company win because of a durable strength?
A large theoretical market does not replace evidence of customer demand.
Understandable economics
The buyer should be able to explain how the company makes money.
That includes:
- revenue model;
- gross margin;
- cost to serve;
- cash conversion;
- working-capital requirements;
- capital expenditure;
- customer profitability;
- operating leverage.
Complexity is not automatically a problem. Unexplained complexity is.
A manageable risk profile
Every acquisition has risk.
The relevant question is whether the buyer understands the risk and has the ability to manage it.
Review:
- customer concentration;
- supplier dependence;
- regulation;
- legal matters;
- technology;
- management depth;
- owner dependence;
- financing;
- cyclicality;
- geographic exposure.
The acquisition should not depend on several optimistic assumptions becoming true at the same time.
Room for operating improvement
A good target may have a strong business but weak operating structure.
Potential areas include:
- reporting;
- systems;
- accountability;
- pricing;
- sales process;
- working capital;
- management structure;
- international expansion;
- governance.
The opportunity should be practical and within the buyer’s capabilities.
Capable people
The company needs employees and managers who understand the business.
A buyer should assess:
- leadership quality;
- employee retention;
- critical knowledge;
- succession;
- willingness to work under new ownership;
- capability gaps.
An acquisition plan based entirely on replacing the existing team carries significant execution risk.
Appropriate seller expectations
The transaction is more likely to work when the seller has realistic expectations concerning:
- price;
- transaction structure;
- timing;
- due diligence;
- post-closing involvement;
- employee communication;
- warranties and risk allocation.
A strong company with an unworkable seller process may not become a viable transaction.
Fit with the ownership platform
The buyer should ask:
- Can we govern this company well?
- Can we support management?
- Do we understand the market?
- Can we fund the company’s needs?
- Does the risk fit the portfolio?
- Is our ownership model appropriate?
A good acquisition target is a company the buyer is qualified to own, not simply able to purchase.