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Determinging Acquisition Criteria
Financial Criteria
Financial criteria are important in any acquisition. My perspective on financial criteria is included on the previous page Previous, Determining Acquisition Criteria, Individuals so I will not repeat it here.
Specific Goals For Companies Acquiring A Business
If you have an existing business there can be a number of reasons to acquire another, that are more important than the calculated rate of return based on past performance. You should factor these into your calculations and negotiations, but you should never buy a business based on rosy projections of the future of any business, whether the projections are yours or are provided by the seller.
Why It's A Mistake To Buy a Business Based On Projections
Let's say that you want to go into the soda business. I may own a cola company, with a great recipe that tastes better than Coke or Pepsi, but if my company is only slightly profitable the recipe is worth little. Should you acquire my cola company and build it into the billion dollar empire that it can no doubt become, it will largely be because of the hard work, risks, and capital that you invested. You can base your price for my business on how much it would cost to come up with a comparable company or a similar cola recipe (see buy vs. build/ leapfrogging startup in the valuation section), but basing it on the value of your projected success is not fair, because if you do so I become a partner in your success without needing to do any of the work or take any of the risk. In the event that a seller wants to share in your success you might consider offering to pay less than the business is worth based on past performance and adding some sort of earn-out so that they share in the risk as well as the reward.
Product and Service Diversification
As a business owner it may be easier to diversify the products and services that you offer by acquiring a company with products and/or services that are related to but not the same as those which you already offer. The new business will come with hard won specific knowledge of their market niche.
Geographic Diversification
You may want to acquire a company similar to your own that allows you to expand geographically. By acquiring a company that already operates in the new area you don't need to shoulder the expenses involved in opening and staffing a new office while you build a customer base.
Acquiring Technologies
Competitors may have technologies that are superior to those you use and can give you a cheaper or better way to run your existing business.
Reducing Competition
If there are few competitors in your niche, reducing the number of competitors may increase your pricing power and your negotiating position with key suppliers.
Increasing Sales Volume
By increasing sales volume you can take advantage of economies of scale and spread fixed costs across a broader customer base. This is especially true for products where there are high fixed costs and low marginal costs.
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