How do you identify an acquisition target?

Acquiring another business is one of the most important decisions a business owner will make. Thorough research is vital to identify a target which will complement the organic growth of your own business. It’s also important to be open minded and objective.

Most acquisitive firms use specialist corporate finance advisers. Their commercial knowledge and technical skills can not only save a great deal of time but, crucially, will allow the management team to continue to focus upon running their existing business.

There are numerous ways of finding a potential target and whilst an internet search is an easy way to start, accessing company information databases is often more productive. It is also helpful to visit trade shows, consult industry associations, and look through trade publications to establish a list of possible targets.

Ideally you should develop a profile of the type of business you want. Gather and review as much relevant information as you can on the markets, companies, products and services you need. Once you have developed the target profile, you can:

  • Consider businesses you sell to, or buy from, already. Many acquisitions and mergers take place between companies that have an existing commercial relationship
  • Encourage senior staff to use their networks to gather information about likely prospects in your sector
  • Speak to a corporate finance adviser. They may have additional intelligence that can support you along with access to national M&A databases

The next step is to refine this into a shortlist. The criteria for making this judgement will vary for each acquirer, but often revolve around the relative size of the potential acquisition, proximity to the buyer (either geographically or in terms of complementary activities) and the profitability of the potential target.

When compiling your shortlist, it is important to look at this from the potential target’s point of view.  How can you make your approach as attractive as possible to them? For example, look at the shareholding structure. Find out the age of the owner or majority shareholders – individuals nearing retirement will be more likely to welcome an approach. Establish if there are private equity shareholders who may be looking for a medium-term exit.

First impressions are crucial and the way you make your first approach will probably determine whether a fruitful dialogue ensues or whether you are rebuffed.

Keep in mind that your interest in the target may well be totally unexpected from the point of view of its shareholders. Caught unawares, their instinctive reaction may be to turn down an approach if it is not handled carefully.  An obvious example is, if possible, send your approach letter to their home rather than business address.

The success of a potential acquisition often hinges on the thoroughness of your preparation. You should evaluate the backgrounds and incentives of different shareholder’s, so you can work out who is likely to be most receptive to your approach, and why.

Timing is also crucial – approaching a business during their busiest period of the year may mean that the approach gets filed in the bin. Be persistent and follow up any approaches if you don’t receive a reply initially.

Equally important is to determine who is the most suitable individual to represent your business. This could be your corporate finance adviser, a member of your board, or a trusted third party who is familiar with the target company’s shareholders.

An approach is more likely to be well received if the strategic thinking behind the potential acquisition is explained in a business-like but tactful way, focusing on synergies and benefits such as operational fit and cultural similarities.

The corporate finance team at MHA Moore and Smalley have a wealth of experience of handling acquisitions of all sizes in a wide range of sectors. If you would like to discuss this blog in more detail, please email our Corporate Finance team on info@mooreandsmalley.co.uk or call him on 01772 821021.

Alternatively, please leave your comment or enquiry in the form below and we will respond as soon as possible.