3 Simple Questions to Ask Before Every Acquisition

In a previous post, we talked to corporate development expert Stenning Schueppert about the two crucial drivers of a successful inorganic growth strategy.

In this article, he shares how to evaluate potential acquisitions once they’ve come down the funnel.

When deciding whether to pursue an acquisition, ask yourself, “Is this a strategic move?”

A strategic acquisition will increase your company’s core value. A non-strategic acquisition will simply add more moving parts. The last thing you want, says Schueppert, “is to be seen as a disparate holding company instead of a cohesive business. Holding companies are valued as the sum of their parts, which is generally going to be less than the sum of the whole.”

These three questions are crucial to evaluating whether an acquisition is strategic. The more questions you can answer “yes” to, the better.

1) Will this acquisition help you grow or supplement your geographic footprint?

Acquiring a company can help you penetrate a new market, if you’re a business that needs a local presence. (This is particularly applicable for service/industrial companies, as opposed to technology companies or companies building widgets that can be sold and shipped easily.)

2) Will this acquisition help you gain a new product set, capability, or service line?

This can in some cases better expedite growth into a new area versus growing purely organically.

3) Will this acquisition add to wallet share?

If you serve Customer X, buying a competitor may mean that you now have all of Customer’s X’s business, or a certain increased percentage of it. By consolidating a competitor and solidifying new barriers to entry, you should be able to improve margins, capture greater market share, build stronger or deeper customer relationships, and strengthen your company. Schueppert notes, “Make sure your sales people are aligned with the acquisition — ensure the decision makers at your customers would be interested in the products or services of your new acquisition. If they’re not, it’s not strategic and you won’t be adding to wallet share — only adding revenue that happens to have the same customer name.”

Schueppert emphasizes that all acquisitions should be accretive. “If you’re consolidating a series of smaller companies, by definition the acquisitions should be at a lower multiple than your own enterprise value. I can imagine only a few reasons it would make sense to ever do reverse multiple acquisitions.”

Completing non-strategic acquisitions will swiftly “destroy value” rather than create it.

Schueppert, who now works in private equity, emphasizes that this is exactly how good PE firms should be evaluating add-on deals. “As soon as you have your platform, you become a strategic acquirer. I now just have multiple companies I’m a corporate developer officer for.”