Proactive criteria help companies looking to make acquisitions

Over the past several weeks, the Stump team has caught up with CEOs across the global furnishings’ ecosystem, and we have been struck by the level of focus and specificity many are bringing to our conversations on acquisitions. Gone are the days of CEOs asking us to “send them everything.” Instead, they have crafted clear guidance on what they are looking for in a deal. We applaud this effort and think this will help enable more win-win transactions.

We see proactive acquisition criteria unlocking the following benefits:

1. Strategic Alignment: It ensures that any potential acquisition aligns with the company’s overall strategic goals and objectives. This prevents haphazard acquisitions that may not contribute to the long-term vision of the organization.

2. Efficiency & Resource Optimization: By clearly defining acquisition criteria, resources such as time, money and personnel are not wasted evaluating or pursuing opportunities that don’t meet the established standards. Time is the enemy of the deal, so having buyers with defined criteria makes M&A processes far more streamlined and efficient for both buyers and sellers. With predefined criteria, the acquisition process becomes more efficient. It streamlines the evaluation and decision-making process, allowing the company to move swiftly on opportunities that meet its criteria. It can even enable preemptive strikes that let a buyer move swiftly prior to a deal launch to take an opportunity off the table.

3. Risk Mitigation: Proactive acquisition criteria help mitigate risks associated with acquiring companies that are not a good fit or that pose unforeseen challenges. This includes risks related to culture, technology integration, market fit, etc. Examples of this that we have seen in our industry include refusal to acquire companies in California because of Nexus regulatory hurdles as well as some companies shying away from acquisitions that expose them to unions.

Overall, proactive acquisition criteria help companies make informed decisions, minimize risks and optimize resource allocation when considering growth through acquisitions. Guidance and governance from a strong board of directors can be key to enabling and empowering this discipline.

When crafting acquisition criteria, it is important to take a systematic approach considering business objectives, industry landscape and strategic direction (a half-baked acquisition strategy is unlikely to unlock any of the advantages discussed above). Here’s a step-by-step approach that we have used to assist industry friends and clients in crafting a strategy:

1. Define Strategic Objectives: Start by identifying strategic goals and objectives. What are you aiming to achieve through acquisitions? Whether it’s expanding into new markets, acquiring new technologies, diversifying product offerings or consolidating market share, your acquisition criteria should align with these objectives.

2. Assess Market Landscape: Analyze industry trends, competitive dynamics and potential growth opportunities to identify areas where acquisitions could enhance competitive position or fill gaps in capabilities.

3. Evaluate Financial Parameters: Determine the financial parameters that are important for your company, such as revenue growth potential, profitability, EBITDA margins, valuation metrics and funding requirements. Consider financial resources and risk tolerance when setting these criteria. In many cases, a conversation with a bank to assess lending availability is a helpful step.

4. Consider Cultural Fit: Assess the cultural compatibility between your company and potential acquisition targets. Cultural alignment is crucial for successful integration and long-term collaboration. Define criteria related to values, organizational culture, leadership style and employee engagement.

Once you have an acquisition criterion, embrace iteration based on feedback, market changes and lessons learned from pursued acquisitions. Flexibility is important to adapt to evolving business conditions and seize new opportunities as they arise. As one wise professor once told me, “Change … it has already happened.”

Stuart Stump Mullens is a partner with mergers and acquisition advisory firm Stump & Co. based in Charlotte, North Carolina.

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