Developing Acquisition Criteria

Once a company has determined that acquisitions are going to be the most cost effective way to increase shareholder value, the next step is to develop criteria for potential acquisition targets. This will serve as a guide, but it’s important to remember that one needs to be flexible.

No target will fulfill every requirement. As we say, a buyer needs to be optimistic and opportunistic if a successful transaction is going to be completed. It might be a good idea to rank the criteria so that one has an idea of what the most important objectives are to the buyer. This will help the buyer navigate through the potential targets faster and more efficiently.

The type of questions one should ask in order to develop criteria should fall under the following categories: general, operating, and financial.

General
In terms of general criteria, there are many important questions to consider. Is retaining management important? How important is the geographic location of the target? How much ownership is the buyer willing to accept if less than 100 percent? Are the corporate cultures compatible?

Operating
When thinking about operating criteria, what products and industries are you interested in? Is market share important? What kind of distribution channels does the other company have? How advanced is the acquisition candidate’s technology?

Financial
With regard to financial criteria, one needs to be clear on the objectives. What kind of revenues and growth rates are you looking for? What is an acceptable debt-equity ratio? What kind of multiple are you looking to pay and is that a multiple of EBITDA, revenues, etc.? How are you looking to finance the acquisition? Would you be willing to pay an earn-out? Does the acquisition need to be accretive right away?

This is a very short summary of the items that should be considered when considering an acquisition. Obviously, some criteria will have greater importance than others depending on the buyer’s strategic goals. Your M&A advisor can help you develop the acquisition criteria, identify and contact the targets, and conduct sophisticated financial modeling and analysis of the potential target. The success of the acquisition starts with the search criteria and will be enhanced by additional analysis.