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Top 8 Qualities of the Company that Makes a Good Acquisition Target

Acquisition entrepreneurship is one of the fastest ways to build wealth in the modern economy. Buying an existing business allows entrepreneurs to skip many of the hardships often associated with entrepreneurship. 

Namely, you don’t need to build something from scratch. Finding an idea, building a customer base, developing operational systems – each of these is an integral step in building a business and none of them are easy.

Acquiring an existing business takes time, careful consideration, and hard work, but it allows people with the entrepreneurial spirit to get a head start on actually growing the business. Still, the actual process of sourcing, vetting, and eventually closing on the business should not be taken lightly. Each company is different and familiarizing yourself with the ins and outs of its staff, operations, and financials takes a certain level of dedication. 

Fortunately, there are certain guidelines we can use to ensure the business that we are considering buying is a good deal. To begin with, every acquisition entrepreneur should have developed their unique investment thesis. An investment thesis is the unique set of criteria that a business buyer can use to help them quickly disqualify deals. The acquisition process requires many hours spent pouring over business financials and the quicker you’re able to recognize a bad deal and move on to another company, the faster the overall process will go. 

For example, if you want to buy an HVAC company, it helps to know what the business´ SDE is. If you have already decided what you´re looking for in terms of SDE, when you see a business that doesn´t provide that amount, you can stop looking at it and move on to another company.

Let’s dig into some of the qualities of a company that makes for a good acquisition target.

High Growth

To begin with, you want to start looking at high-growth industries. Home services businesses are often a safe bet as they provide protection against potential economic downturns. After all, if you’re toilet breaks, you’re calling a plumber no matter what state the economy is in.

Businesses in these industries can usually be depended on to grow by a certain amount. For example, the U.S. HVAC services market is predicted to increase in value from $25.6 billion in 2019 to $35.8 billion in 2030.

Low Risk

While you want to look for companies in high-growth sectors, it’s also a good idea to look for companies that have already made steps to mitigate risk. Turning back to our example of a home services business, many HVAC companies have times of the year that are less busy than others. If these periods aren’t managed properly, they can prove to be financially difficult for the business.

Some HVAC companies can firm up their yearly income by offering subscription services. For those customers who buy a subscription, the company will offer to inspect their furnances or air conditioners during the less-busy times of the year. These inspections are a great opportunity to upsell their customers on new offers or identify potential issues that need to be repaired, each generating income. These subscriptions also provide recurring revenue that the company can count on throughout the year.

When you encounter a company that has obviously worked to mitigate and lower potential risks in this manner, it’s a check in the “positive” column.

Is It a Good Target: How Is The Business’ Financial Health?

While the business valuation can go a long way toward helping you determine the overall health of a company, you also need to dig into how well it’s doing financially speaking.

Do some research on cash flow and other financial liabilities including outstanding debt like notes, accounts, interest, and sales payable.

At a minimum, the general consensus is that you need:

  • The last two years’ worth of financial accounts (profits, losses, and balance sheets).
  • Financials for the current year.
  • Business Activity Statements from the last four quarters.
  • The last income tax return.

Dig through the financial records in order to confirm their accuracy. For example, if you want to buy an online business, look at website traffic to see if they match the numbers provided.

Relevant Industry

Another way to think of “relevant industry” is as a personal strategic differentiator. 

That is, what can you bring to the business that will help it succeed that no one else can? Perhaps your grandfather was a plumber, and you picked things up over the years that will decrease the learning curve if you buy a plumbing business.  Maybe you have experience in digital marketing that will allow you to grow your customer base more rapidly than others. 

Whatever the case, look for an industry where you might be able to bring something unique to the table to increase your chances of success.

Geographic Diversity

Is the business capable of expanding beyond its current addressable market? This calculation can be made by investigating a business’ total addressable market (TAM). If the TAM is bigger than what the company currently serves, it may make for an excellent acquisition target.

Proprietary Technology or Existing Assets

If the company has existing assets (ie: trucks, real estate, etc) or proprietary technology (ie: unique operational methods), then it is worthy of consideration depending on the state of those assets. After all, if a business’s assets are enough to cover potential debts incurred during the growth of the business, then the lower risk is in acquiring that business.

Strong Management Team

If a company has an existing management team, and that team is good at what they do, then it can be an excellent selling point for any business. Companies like Acquira are often hired to ensure an effective leadership team is put in place at a business. And this takes time.

If a business already has a strong management team, then the owner can often step away from the day-to-day operations of the business to concentrate more on strategic planning for the future.

Brand Moat

“Better to buy a wonderful company for a fair price, than a fair company for a wonderful price.”

  • Warren Buffet

Brand moats ensure that a company has a certain amount of notoriety and respect amongst its customers. If the business is so well-regarded in its community that people seek it out, that cuts down drastically on marketing costs. It also signifies that the company may have more potential for global reach. That is to say, its systems, operations, and business practices could be expanded to new regions.

Conclusion

Acquiring a business is a great way to speed up the entrepreneurial process. Instead of whiling away time building out the staff and systems necessary to succeed, you can find a company that already has those in place and start strategizing how to grow that company. Still, buying an existing company takes work. By identifying those qualities that make a company a good potential acquisition, you’ll be able to work through the overall acquisition process much faster.

Jaxson henry
Jaxson henry
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