Six factors: When is the right time to acquire a company?

April 28, 2021

Six factors: When is the right time to acquire a company?
Business resources

There’s a promising company in your sights and you’re weighing up whether you want to pull the trigger and approach them with an offer of acquisition. It’s a significant decision and a defining moment in the timeline of your business and career as an entrepreneur.

It’s also difficult to get right. Unsurprisingly, there is a diverse range of factors that affect how much money you’re willing to pay for a company – and getting that assessment wrong can be a serious problem.

Research performed by Intralinks and the Cass Business School has shed light on the subject of acquisitions. Working on over two decades of data, They have found the most important factors relating to the purchase of a business.

Today we’re looking at six of these factors and the research that identified them as important. Keep scrolling!

Potential profitability: Unsurprisingly, an overarching metric used when considering acquisition is simply how profitable the business in question is liable to be. Generally speaking, research has long concluded that private companies tend towards greater profitability than those that are public.

As a business owner or entrepreneur, you’ll also want to consider the timeline of that potential profitability. If you’re short on capital and have just enough money in the bank to make a reasonable offer, the pace at which your return on investment will be made may drastically alter your final decision. A manufacturing company with a high single product value and a long production time, for instance, may leave your cash flow drained and disrupted for longer than you are able to handle.

Likely growth: It’s vital that a business owner seeking an acquisition looks at growth as more than a simple opportunity. This double-edged sword can cripple an operation post-acquisition if money is tight, leaving the new business owner unable to capitalize on sudden peaks – or troughs – of expansion. This can backfire in a PR sense also – a particularly damaging possibility with the viral nature of the internet spreading stories inside and outside of your industry and network.

How you view likely growth will depend entirely on your circumstances and strategic planning. Be sure to appraise the present state of your business and consider how you can react to both the best and worst-case scenarios in terms of expansion and growth for the company you wish to acquire.

Debt: The amount of borrowing a company has done will affect its desirability for you as an entrepreneur and potential new business owner. The amount of debt a company is in will drastically alter your strategic planning post-acquisition, making it a high priority when weighing up how desirable a company is for you.

Assets and liquidity: The speed with which you can sell assets in the target company to invest in new areas will play a major role in determining whether it’s a good fit for you or not. If you have a limited budget and have secured finances via something like a reputable business finance lender, it may be a priority for you to pursue the acquisition of a company with a higher degree of liquidity so that you can redirect this money into important areas quickly.

Conversely, if you are acquiring a company without an urgent need for it to become profitable or to grow rapidly, a business with lower liquidity that fits your other criteria may be desirable to you.

Company size: Acquiring a business is one of the most significant financial decisions you will ever make as an entrepreneur and business owner. Because of this, the size of the business you are considering is going to play a major role in your decision to buy.

If you are seeking to acquire a company larger than anything you have managed before, it may be sensible to invest in the services of consultants in areas such as Human Resources. This is particularly relevant if you are acquiring a company that employs specialists in some manner.

Talent shortages are a significant and widespread phenomenon in global business and the tendency for professionals to move more freely between companies means employee engagement and wellbeing are paramount. If you are not prepared to manage a company that benefits from the employment of highly desirable and valuable professionals, you run the risk of seeing that talent move away from your new asset once you have acquired it.

Brand image: A highly relevant area when considering acquisition is the present state of the target company’s brand and perception within its industry. An acquisition may disrupt this image negatively, which can be especially troublesome if the brand’s image is poor already.

Once more, you may benefit from hiring consultants in this subject to help appraise the state of the target company and to offer suggestions for managing the acquisition and brand in the future. This can help you to avoid having your once-profitable new asset suffer from a period of disruption and damage during that most critical of periods.

Food for thought

And there you have it: six areas which are of great importance to a business person seeking to acquire a public or private company. By being prepared to expand your budget to include the support and expertise of consultants and to plan for worst-case scenarios surrounding the acquisition, you can minimize your risk.

This should always be a priority when you’re making a weighty decision in your business or entrepreneurial career. The Idea Financial team hopes today’s article has helped to educate you and to expand your understanding of what factors to consider as you prepare for acquisition.

If you are considering sourcing additional capital for the planning and acquisition of a company, please get in touch with our team today.

Idea Financial