3 Guiding Principles when Acquiring a Company

Introduction

If you’re looking for an acquisition, it’s important to dig deep into a company and understand its target customers, industry segment, and future plans. In order to be successful, entrepreneurs must be reactive rather than proactive and ensure that the exit plan in place fits what you are looking for. When thinking about your next move, use these three guidelines to lead you towards the perfect company for you to buy. 

Customers

The ability for a company to keep its target customers around is key to both its past and future success. Ask yourself how does the company address its target consumer’s needs and expectations? Who are the company’s best customer segments? How do these customers perceive the company? What are the strengths and weaknesses of the company? 

In addition, watch out for customer concentration. Is much of the company’s revenue generated by a select few customers? How concentrated is their market and is there growth to be had from those customers? How does these factors fit into the plan in the long term? 

Test these questions out by considering having the company do a formal survey of its customers. Ask the company for its past history of customer relationships. Look for the ability to build new relationships with different customers. 

Industry Segments

Even good companies in poor industries will struggle eventually. Conversely, a rising tide usually lifts all ships, but it is important to understand the industry and your competitors to avoid sinking. What are the keys to the industry and how does the company perform relative to these measures? How does the company differentiate itself in comparison to its competition? 

Make sure to conduct an industry analysis of the competition surrounding the industry. Look for companies in industries with the potential for long-term growth and without fear of external shocks. 

Future Plans

Ensure success by taking a close look at the exit plan the company has in mind. Before closing, what actions you will take immediately after the deal? In addition, will the original owner of the company stick around to ensure a smooth transition? How will you navigate that transition with sensitivity? 
Finally, how will you drive improvements in savings, revenue increases, customer satisfaction, and market share? Thinking about how to maximize your return on investment now will fulfill your dreams later. 

Make sure you ask all of these questions when you are thinking about making your next big move. Ensuring that the target company has the right exit plan in place will help you make a smooth transition towards running a successful business. These guidelines will drive you towards the right decision - now it’s your turn to act! 

Jeffrey Tse, Private Equity Intern