A weekend treat – complimentary extracts from my new book. The Acquirer’s Playbook was recently published on Amazon. It sets out a simple little process map to build M&A capability into your business – The Acquisitions Approvals Model. Using extracts from the book I explain the essential first phase, stage 2, of getting acquisitions right – the acquisition profile.

Stage 2 – Produce Acquisition Profiles

 Because you are clear on your strategic direction, it is possible to create a shopping list. This is not a list of names but rather a list of key characteristics of the type of targets that fit your strategy. This document is your Acquisition Profile.
The Profile can be used both internally and externally to inform trusted advisers and relevant connections in your network to increase deal volume being brought to you.

Here is an illustrative example from the software world:

Acquisition Profile

Investment Thesis: Purchase a software company that has the potential to dominate a unique niche and grow the company into a $100+ million market segment leader.

Key Elements of Strategy:

  1. Recurring revenue model providing a “utility-like” capability to end-users
  2. Compelling and easily communicated value proposition to end users with the potential to be disruptive to legacy business practices
  3. Defensible, niche application within a space that we can define and dominate
  4. End-user market that is $500 million to $1 billion so as to be attractive to us but does not attract the large software competitors
  5. Strong underlying code with improvement opportunities in the business processes of the company
  6. Under-achieving relative to the market potential of the software’s capabilities
  7. Purchased at a reasonable price relative to current performance and growth opportunities to take advantage of the current market environment

Target Characteristics:

  1. Model: SaaS or hybrid SaaS/on-premise software model
  2. Revenues: $10 – 30 million
  3. Geography
    • Tier I – Eastern MA, Southern NH and Southern MA
    • Tier II – New England
    • Tier III – Northeast U.S.
    • Tier 1V – West Coast
  4. History: preferably 10 years of operation
  5. Legal Status: Private or Subsidiary/Division of Public Company
  6. Assessment of Qualified Candidates:
    • Revenue growth & Profit Margin
    • Age of company
    • Industry vertical
    • Functional activity served
    • Operational fitness

Acquisition profiles are living documents. They need to be reviewed regularly for relevance. Often because an acquisition strategy involves confidential diversification into contiguous sectors, these profiles can only be shared with a discrete, well-qualified audience. Nevertheless by articulating the type of businesses that make sense, acquirers are forced to focus on businesses they should be buying not what is up for sale.

I’ve seen acquisition profiles include companies in distress. The profile states that loss-making targets should be considered. I would urge caution in attempting turnarounds unless you have built up a track record of success. Perhaps you’ve done some small deals that were loss makers and had great success. However the most expensive acquisitions are ones that are acquired for a $1 but the post-acquisition costs to fix them are crushing.

Even huge companies who have done many acquisitions can underestimate the cost of fixing a problem. The acquisition of Countrywide by Bank of America for $2.5 billion, according to some estimates, has run up a post-acquisition cost of an additional $47.5 billion!

So think carefully on what you want to buy. Consider the skillsets of your team and consider at this early stage how these types of target companies will be run under your ownership.

The Acquirer’s Playbook can be purchased here. I run workshops to explain our process map – The Acquisition Approvals Model and our practice specializes in building M&A capability into your business.

These workshops are a great way to test your own process, implement a new one or tweak parts of an existing process that’s not working. Reach me at Ian@TPPBoston.com. 

If you missed it, Stage 1 here.