An economic lull can be an ideal time to purchase a business. However, it’s also a time to be more critical conducting due diligence to determine why a business is for sale and whether the acquisition would be beneficial in the long run. It may be tempting to buy a business or organization if the perceived quality is high and the sticker price is low, but if the business is hard to fold into the purchaser’s existing company, aggressive organic growth may be a better option.

An economic lull can be an ideal time to purchase a business. However, it’s also a time to be more critical conducting due diligence to determine why a business is for sale and whether the acquisition would be beneficial in the long run. It may be tempting to buy a business or organization if the perceived quality is high and the sticker price is low, but if the business is hard to fold into the purchaser’s existing company, aggressive organic growth may be a better option.

In the current tight economy, private companies are making quick decisions while attempting to stay ahead of the game. Some middle-market companies are taking advantage of the economic downturn to seek business targets for strategic acquisitions. Others are downsizing in anticipation of a recession.
Mergers and acquisitions remain a key growth strategy for private companies, and while the number of large-company mergers has slowed, middle-market transactions remain strong.

The investment community is optimistic that bankers, brokers and executives are looking for strategic-buyer transaction opportunities in the private sector, particularly in healthcare, energy, real estate and financial services. Potential owners should conduct an accurate business valuation to determine why the business is for sale and to compare the fair market value with the investment value.

Due Diligence Process
First up in the due diligence process: define and prioritize the key motivators of an acquisition that would ideally maintain a current business platform while growing the organization in the number of employees, amount of intellectual property or percentage of market share.
By defining and prioritizing the key motivators, business owners can further develop criteria for acquisition targeting. A methodical acquisition evaluation and execution strategy will increase the likelihood of a successful transaction and serve as a crucial step in ensuring the “ideal” acquisition is made.

10 Key Questions to Ask
The following 10 key questions help to uncover the primary drivers for businesses considering an acquisition. The questions will help determine if it is in the company’s best interest to acquire a business and, if so, which business in the interest pool would provide the most synergistic relationship. The more “yes” responses, the more beneficial the outcome will be. Fewer “yes” responses will put a possible acquisition into perspective, revealing that moving forward could do more harm than good.

1. Will the organization gain a valuable new technology, product or process?
2. If a new product line is acquired, will it complement current products?
3. Will the company expand its geographic presence to better serve clients and consumers?
4. Is there an opportunity to enhance operational excellence?
5. Will the company gain ownership of sought-after equipment?
6. Will the company be able to strengthen the management team or overall culture?
7. Do cost-cutting opportunities exist?
8. Will the opportunity provide the organization with a defensive strategy for competitors?
9. Is there a specific client or consumer request to purchase a business or locate in a given geography?
10. Is there an industry-specific need to purchase a business or organization, whether strategic, regulatory or trade-related?

If the purchasing organization does not define the ideal acquisition in the beginning stages, it may unintentionally consider merging with or acquiring a business that would not have as synergistic a relationship as it could have accomplished if it went through the exercise.
Also, for a business owner considering a merger, divestiture or a sale of the business, answering the 10 key questions can help determine the best route for an exit strategy or combined infrastructure. On the other hand, going through the process of answering the questions about a company should confirm a business owner’s decision to sell.

In the case of a divestiture, a business owner can answer the questions to better understand the value the asset for sale could bring to an acquirer, instead of focusing on what drove the business owner to divest in the first place. After all, one company’s problem can be another company’s answer.

In this “buyer beware” market, there are many good deals to be done, but keep in mind that a bad deal in a bad economy is a recipe for disaster. Having a clear understanding of what differentiates one target from another, and keeping those characteristics in the forefront, helps focus due diligence in the areas that really count.

Originally written by Jefferson Wells (www.jeffersonwells.com) and edited by Financial Executive.
© 2008, FEI. Reprinted with permission from Financial Executive; www.financialexecutives.org.