5 questions to ask before you acquire a business

If you’ve decided to accelerate your business by acquisition there are a number of considerations you need to make before you can commit to this method of growth. In addition to ascertaining whether your business is in the right shape to take on an acquisition, you’ll need to prepare for the process of negotiation and integration.

Here are five questions you should ask before you acquire.

1. IS ACQUISITION RIGHT FOR MY BUSINESS?

Do some research to find out whether your business is actually suited to growing by acquisition: it needs to be the right thing to do at the right time. Perhaps you have good organic growth and should focus your efforts in maximising that before turning to acquisition, or perhaps your business is not suited to the acquisition process at all.

2. IS MY BUSINESS READY TO ACQUIRE ANOTHER?

The attributes you need to look at to find out whether your business is ready to acquire combines your financial readiness and your business readiness.

One good measure to determine if your business is financially ready to acquire another is if you can readily raise capital from your bank. Big banks are conservative and if they will lend to you on a ‘cash flow’ basis, then it’s a good sign you’re financially ready; if they refuse, then you need to question if you are really ready. Other forms of debt can be expensive and using equity is even more expensive, and sometimes those funds are better invested elsewhere for lower risk gains.

As the leader of the business, you need to ask whether you’re ready to lead your company, the new company and the integration process between the two of them. If your business does not seem culturally ready to integrate with another, reconsider the timing of the acquisition and be extremely careful about the selection process.

3. WHAT SELECTION CRITERIA SHOULD I USE?

Once you have decided your business is ready to acquire, develop a set of a selection criteria based on why you want to use acquisition to grow. The reasons may range from swallowing competition, to growing your client base or product range, which means the business may be very similar to yours or different because you want to diversify.

For us, a good acquisition target is one that:

•Will bring us profitability

•Has a core business that corresponds with ours

•Has a mid-market client base like we do

•Will give us access to a client base, product set or geography we don’t currently have or would like to expand.

Be very strict about your selection criteria and don’t let anything distract you from seeing whether the business is a good target. We once bought a distressed asset because it seemed like a bargain at the time but it turned out that we couldn’t salvage the parts of the business we thought were valuable. The lesson we learnt was if it sounds too good to be true, it probably is.

4. HOW SHOULD I NEGOTIATE?

If you’ve been strict about your selection criteria, you’ll already know what kind of benefit the acquisition will bring. Go into negotiations having done your research about how much it will cost, not just in money but the time and effort to integrate the business before you’ll see return, and possible productivity loss from your current business during transition.

Put yourself in their shoes, but don’t overpay—things are worth what they are worth and nothing more. Remember there are two processes: what something is worth and what you are paying. By the same token, you get what you pay for—if it’s cheap then there is a reason for that.

5. HOW DO I INTEGRATE THE BUSINESSES?

Many acquisitions fail because the integration doesn’t happen swiftly enough or the cultural clash between the two is too great. Be brave, do it quickly but be sensitive to the people involved because without the people you will generally have purchased nothing. When staff leave, clients are only one step behind.

Our acquisitions haven’t been big enough to hire a dedicated change manager for the integration process, but we do arm our line managers with some coaching and training so they can handle the change as it happens.

We’ve also made mistakes. We acquired a business that was not core, and the staff had a hard time transitioning because the acquired business rewarded different types of performance to ours. Don’t stray too far from your core competency so there’s at least a chance the cultures can integrate smoothly.

The acquisition process will be different for each individual business but the lead-up is the same. These five questions will help you prepare.

All the best.