Beyond timing, what do buying companies really look for when they consider a new acquisition? Any buyer is going to have their own set of criteria depending on market conditions, strategic direction and available opportunities. Buyers essentially have at least 7 criteria they look at:
1. Vision Fit. Do you have similar visions or strategic objectives? If these differ, then the companies may work out financially for a short period of time, but conflicts will eventually slow integration to a halt.
2. Culture Fit. You can pretty much tell this as you get to know the people in the target company. Are they customer oriented, product technicians, do they share success with their employees, are they just money oriented serving only the top people, is there a dominant owner where all decisions flow up and no responsibility rests with management? The list can go on and on. There needs to be a strong match for short and long term success. So many acquisitions fail because of a bad fit here.
3. Business Fit. Know what you are buying – people, products, and markets. As the Manager of Planning and Economics for a coal mining company I was involved in a number of acquisitions over time. One deal involved buying a company nearing bankruptcy that offered a product in a highly competitive Ohio River market with no real transportation or quality advantage. A vanilla product, last in line for transportation access, union operated with cost and location disadvantages. Management wanted this property for “geographic and market diversification”, thought better equipment and mining practices would lower costs, and thought unproven technology would win out. What were the odds of success? Not good. And not good turned out to be the result. Stick to your knitting and know what you are buying.
4. Strategic Fit. So what does this entail? Sustainable profitability, product differentiation, something unique – technology, location, patent, first to market, or just plain old opportunity. I was involved in the asset purchase of a particular mine on Colorado’s western slope for the bargain price of $5 million. The property had experienced a fire. The owner had its insurance settlement and did not want to continue to operating. So we ended up restoring operations and allowed a mid-western utility to buy out its supply contract for $12 million. We re-sold production profitably into the Pacific Rim and sold minority equity stakes for another $5 million. Within 10 years the property was generating $50 million annually as the reserves were a unique product satisfying new EPA regulations and prices shot up.
5. Customer Fit. Customers will tell you what they need, who you should look at, what appeals to them, what you are doing right and what you are doing wrong. Just think about the transformation of the video rental market. VCR tapes were replaced by DVD’s, which have been replaced by streaming videos. Brick and mortar shops are being replaced or transformed. Remember those late fees? Well over 10 years ago I asked for a late fee to be waived by a particular brick and mortar shop that I had been a loyal customer with. They refused, I switched to Netflix the next day, and I never looked back. The store closed within one year. Technology and ease of access transformed the industry.
6. Geographic Fit. Geography always matters, no matter what size your business. Small businesses are going to look for locations within striking distance as they expand within a city, region, state, etc. Large technology companies may not have to deal with geography in the same way, but nevertheless face challenges. It could be simply for tax reasons. Companies may move headquarters offshore to minimize tax exposure here, and may look to overseas companies for acquisitions rather than importing foreign cash for deals and have it taxed twice.
7. Clean Financials. Poor financials and bad info will kill a deal as fast as anything. If a business cannot prove is numbers, support its forecast, close its books on time, has no budget or plan going forward, would you pay millions for it? Of course not. And a smart buyer will run fast.
Jerry Mills, Founder and CEO of B2B CFO® recently penned an article for CFO Magazine entitled Prepping the Financials for a Sale. Jerry discusses how a buyer thinks and how its due diligence team will attack a seller’s short comings. Buyers typically will not be too concerned about the sellers’ price if they have an interest. They’ll accept it to take a peek under the hood. And then they’ll go to work hammering it down.
If you are a seller, start thinking like a buyer! Look at your own business and ask would I really pay as much as I think its worth? Stay ahead of the game, fix the problems upfront.
Here at B2B CFO® we have 6 partners in Florida that are experts and can help out. Nationally we have about 230 partners with over 6700 years’ senior executive experience. We have national affiliations, and are the largest U.S. firm serving this market. We know how buyers think because we’ve been buyers. And we’ve been sellers. What does this mean for you? Better preparation and higher values. Let us help you get ready!