There are a lot of things to think about when you endeavor to acquire a business. One major consideration is to understand how the existing owners ran the business and what in terms of resources – both financial and human - you bring to the table that will enable you to run the business.

Asking the right questions, doing the necessary research, and establishing an effective business plan are all part of the pre-acquisition process. There are advantages to buying a business rather than building it from scratch. You will gain an existing economic infrastructure that includes a customer base, employees, a lease, suppliers and presence in the marketplace. It is still necessary to carefully evaluate the target company especially if it operates outside of your industry. The geographical region must also be studied to understand the competition and demographics.

Here are the questions to ask before beginning an acquisition
process —

Why do we want to consider making an acquisition?
There should be one or more compelling answers. There can be the desire to —

• Accelerate growth in a basic business
• Add product lines
• Expand into new areas
• Enter new geographical markets
• Acquire capable management

When do we want to consider making an acquisition?
The process of engaging in an acquisition – not to mention an aggressive program of acquisitions – is time-consuming and can absorb critical management time and energy that may be needed for the basic business. The proper time is when management has the time and energy to engage in the process at the appropriate levels.

How are we going to engage in this acquisition effort?
Conducting an acquisition involves many steps and phases. Targets have to be identified, qualified and contacted; your proposal has to be presented to the potential sellers; and negotiations have to be conducted with one or more prospects, perhaps simultaneously, so that the transaction can be completed in a reasonable timeframe. And if multiple acquisitions are being explored, consider how much more difficult this process becomes.

It is vital that you conduct a due diligence study of the target company. You need to thoroughly review copies of the company’s financial records, including the cash flow statement; balance sheet; receivables and payables; employee files, including benefits and employee contracts; pending litigation; and any tax liabilities.

What are we going to do if we actually succeed?
It is essential to begin planning for the integration of the target company before the acquisition process begins. If you cannot envision how the target(s) would fit financially and culturally in order to begin to articulate a business plan for integration – even if only conceptually at first – you may not be ready.

Remember that the acquisition is not the end objective. A successfully integrated and profitable acquisition is the objective, so begin with the end in mind.

About the Author
Z. Christopher Mercer, ASA, CFA, is founder and CEO of Mercer Capital located in Memphis, Tennessee. Mercer Capital provides business valuation and investment banking services to a national and international clientele. Investment banking services are provided through Mercer Capital Advisors which specializes in providing merger and acquisition services to sellers or buyers of private businesses or public companies; divesting divisions; and subsidiaries. Chris can be reached at mercerc@mercercapital.com.