1. Begin with strategy.
Your overall growth strategy should be the primary driver and guide for your acquisition. While this is a simple principle, it can sometimes be forgotten in the excitement of the deal. Do not acquire a company simply for the sake of acquiring a company. While acquisition can be a powerful and rapid tool for growth, buying the wrong company can be an expensive mistake!
2. Use a demand-driven approach.
In our typical M&A process, we have clients pursue markets before researching individual companies. The reason is that selecting the right market is critical to successful growth. The market should have healthy, stable demand for your products or services and be aligned with your overall growth strategy. We strongly recommend selecting a market prior to identifying acquisition targets or potential partners. Without understanding market dynamics, you may be tempted to pursue what looks like a promising opportunity, only to find that the market is in a serious decline. In addition, market research will help you enormously when it comes to evaluating and identifying potential companies to acquire.
3. Develop measurable criteria.
Again, the criteria should be aligned with your overall strategy. Criteria can include growth rate, size, geography, customers, or key players. It’s best to pick six criteria – too few and you won’t cover all necessary aspects, and too many will cause you to lose focus. Begin your research at a high level and then progressively zero in on individual market segments you find attractive as you gather more information. As your research progresses, you’ll have a better understanding of the markets. Make sure to use your criteria to remain objective.
4. Expand beyond the “usual suspects.”
It’s important not to fall back on the “usual suspects” or businesses that are already known to you. There’s nothing wrong with pursuing “usual suspects,” but they should not be your only source of candidates. Turning to these companies alone may mean you are ignoring a whole host of companies that could be strategically valuable acquisitions. Conducting market research will likely help you identify fresh companies that you didn’t even know about.
5. Remember the human factor.
Acquisitions involve much more than just financial figures. It’s extremely important to develop relationship with owners, especially in privately-held, not-for-sale acquisitions. Many times owners view their company as their baby and convincing them to sell to you involves much more than just a fat paycheck. Consider the owner’s drivers and motivations. What does he or she really care about? Developing a strong relationship with an owner early on in the M&A process will greatly benefit you when it comes to due diligence and negotiations.
Best of luck in pursuing strategic acquisitions in 2016. For more tips on strategic M&A, be sure to subscribe to the Successful Acquisitions blog.