How can you tell if a potential acquisition deal will work out in your favor? Hint: It's more than just the purchase price.
Like any ambitious businessperson, I want to court high-quality business deals while sidestepping the stinkers. I'm looking for companies that will either generate operational revenue into the future, or can be sold for a healthy multiple of what I spent on them. In specific terms, I want a return on my total investment (including integration, operation, and improvement costs) in three years or less.
My best acquisitions were often companies I bought for consolidation. These had steady, portable revenue but messy operational processes, so shutting them down and rolling them into another business has proven to be a great strategy. Consolidation grants lots of opportunity to maximize profit while leaving room for error in the integration process. If revenue and market forces remain steady (and the absorbing company has high operational efficiency), it's hard not make money with consolidation.
My worst acquisitions usually came from purchasing standalone companies in an effort to improve their operational efficiency and raise profits without a clear sales growth strategy. When your attention is on efficiency, revenues can slip and eat up the gains you made on the operational side. This happened twice to me in my career.
I can chalk the first incident up to being younger and not fully understanding the risk. The second time was quite a "fool me twice, shame on me" situation. I saw the same risk pattern, but thought I was smart enough to get around it. I thought, "What are the odds of this happening again?" Sure enough, it happened again. Ever since that second mistake, I structure the deal so that the seller helps manage as much risk as possible.
These days I evaluate companies for acquisition on three levels: how the deal is structured, how much time the acquisition requires, and what the new company culture ought to look like.
How is the deal structured?
If you buy a company under advantageous terms, a “bad” company can be a true winner. You should obviously complete due diligence on a company’s market, financials, and operations, but the deal structure is far more central to managing risk and increasing your odds of success.
How much time will it take?
It's easy to get hung up on the monetary costs of acquiring and integrating a company, but don't forget about cost of time, too. You need to be highly aware of the time a new acquisition will require from your existing management and integration teams. One deal might be a walk in the park, but others will need ongoing focus for an extended period of time.
Risks to your time need to be managed on the same level as financial and operational risks. If you miscalculate the time commitment, you'll end up paying a high opportunity cost down the road.
What should the company culture look like?
If you are going to purchase a company to keep it operating (instead of consolidating it into another company), you need to be very aware of the company’s existing culture. You furthermore need to consider how it will fit with the culture that you are bringing to the table.
Turning a good culture into an even better culture is one of the hardest things you can do, and changing bad to good is even harder! You must be aware of how cultures are going to interact and intersect as you begin your integration process.
A company's sale price is an important statistic for any acquisition, but it doesn't get at what the company does, what values it holds, or the terms its executives set as company ownership changed hands. When you can effectively manage all these at once, then your acquisition is bound to go smoothly.