Acquiring a company is an opportunity to expand your industry share. In this guide, we guide you on the biggest success factor of all: identifying companies for acquisition.
Acquiring a company is an opportunity to expand your industry share, bring new talent into the company, and even remove a competitor from the market. Regardless of your reasons for pursuing an acquisition, it’s critical to identify suitable targets.
Getting your deal across the line is no guarantee of long-term success. According to one study investigating 40,000 M&A deals over the last 40 years, 70-75% of corporate acquisitions failed to achieve their objectives.
In this guide, we guide you on the biggest success factor of all: identifying companies for acquisition.
Identifying your acquisition goals
All acquisitions have specific goals. Setting clear and well-defined goals determines your approach and defines the line between success and failure.
For example, the total UK deal value for foreign takeovers in 2024 increased by 83% year on year, indicating a clear desire to expand into the British market. But what are your goals?
Examples may include:
Think about why you want to acquire a company, and you’re positioning yourself to create a shortlist of suitable targets.
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Identifying the right targets for a merger or acquisition
What makes a great target depends on your primary and secondary objectives for acquiring another company. The first step is to develop a profile of your ideal acquisition target. Factor in the markets, companies, products, services and expertise you need to achieve those goals.
Several options exist for identifying targets. Examples of channels to explore include:
Remember, most M&A transactions don’t begin with a listing, as you would expect when buying a property. Although such listing platforms exist, they don’t provide a complete overview of the market, which is why leveraging your network and enlisting professional help is critical for uncovering targets.
How long your shortlist is will depend on you. A good number to aim for is a shortlist of ten potential businesses with pros and cons as to why they make suitable targets.
How to value a company for acquisition
After creating your shortlist, it’s time to begin trimming them down. One way of removing unsuitable candidates is to begin creating rough values for each company. At this stage, you’re still on the outside looking in, meaning that any valuation you arrive at at this point will only be an estimate, not a defining figure.
The value of a business can be assessed using several methodologies. You can take its net assets and earnings, rely on multipliers, or simply examine sales of similar businesses in the past few years.
How much information you have access to will depend on whether you are purchasing a private or public limited organisation. The latter is required to comply with more in-depth reporting requirements, meaning you already have more information to work with.
Again, this is where the value of an independent agent shines through.
Approaching a company for acquisition
After assessing the value of companies on your shortlist, the time has come for you to approach the most suitable targets. This is where you will open up negotiations with the owners of said businesses and determine the likelihood of a potential deal progressing.
Here are three points to bear in mind:
1. Disclosure – Be upfront with the owner about why you are approaching them and why a deal makes sense. This should also include how you’re going to finance a prospective deal.
2. Questions – Expect owners to ask questions about your deal and what it might look like. See this not as an interrogation but as an opportunity to explain your future plans if the acquisition goes through.
3. Planning – Don’t be afraid to ask the other owner whether they already have plans to sell. Even if they say they have no plans to sell, this doesn’t necessarily mean they’re against the idea of a sale.
Typically, if a business seems interested in pursuing a deal, you will be expected to write a Letter of Intent (LOI). An LOI represents your formal interest in an acquisition and provides a framework for what a deal might look like.
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Using an M&A consultant to support an acquisition
M&A consultants are types of business consultants specialising in supporting mergers and acquisitions. They act in a broad fashion, offering a series of a la carte and end-to-end service options for businesses looking to pursue an acquisition deal.
Examples of ways in which these consultants can support these deals include:
It’s also worth mentioning that consultants have professional networks of their own that they can leverage to help match your company with suitable targets. They take the time and effort out of the M&A process while increasing your chances of making a successful acquisition.
At Hilton Smythe, we understand that even experienced business owners can find the M&A process intimidating and complex. That’s why our team of M&A consultants are on hand to provide support and guidance every step of the way. For identifying targets and propelling the M&A process forward, speak to the team today.