You can boost your company’s size, and hopefully its profits, by making a smart acquisition. Not all acquisitions make sense, and an ill-conceived one can send your small business down in flames. So it’s important to size up a target company along several dimensions before making an offer.

  1. Financial: The two financial questions you have to ask are whether the numbers make sense and can I afford the purchase.
    1. Due Diligence: Just because your business is small doesn’t excuse you from doing due diligence on a target company. This means using certified auditors to comb through the target’s books, and having lawyers examine all contracts, agreements, pending lawsuits and any other legal baggage. You need to know that the numbers add up, that the owners aren’t hiding something that could come back to haunt you, and that everything is on the up and up.
    2. Capital Structure: Can you afford the takeover, and will you have to sell off parts of the combined company in order to cut expenses or pay for the acquisition? Are the target’s assets and liabilities congruent with yours? One suggestion is to make sure you not only have the cash available to pay for the acquisition, but also to cover the costs involved with vetting the purchase, and enough to cover additional expenses associated with operating the new venture.
  2. Defining Your Market: What effect will the acquisition have on your market(s)? Will you be expanding your products/services, and if so, is there sufficient demand given whatever constraints you have, such as location and demographics. You’ll need to perform a market analysis, which requires considerable research, such as forecasted demand, market growth rates, the competitive landscape and the barriers to entry. This is all the more important if you are entering a new or undefined market.
  3. Effect on Your Brand Image: Does the acquisition make sense from the customer point of view. If you’ve developed some brand recognition, you’ve cultivated a customer base with certain expectations about the types and quality of your offerings. It might be confusing if the target isn’t a good fit for your brand image, even if the acquisition is financially sound. For example, if you run a plumbing supply company, buying a profitable bakery, while perhaps a moneymaker, would be irrelevant to your primary mission, a distraction that doesn’t do anything to boost your core business image.
  4. Cultural Fit: You’re not just buying a company; you’re likely bringing on a new team of employees. How will they fit in to your company culture? Will they be a cohesive group? And then there is the question of overlap. Acquisitions make sense when there are economies of scale, which means you might have to layoff staff, for example, you might not need two accounting departments or multiple sales people in a certain region.
  5. Non-Compete Provisions: If you are buying out another entrepreneur, the last thing you want is for that person to use the windfall to launch a new competitor. Make sure that you work closely with your legal team to craft non-compete provisions for all key people at the target company, and don’t proceed unless these people all agree to the provisions.

Acquiring a company is an exciting and often quick way to grow your business. In addition to reviewing financials, making plans for employee transitions, and checking legal documents, make sure you’re prepared financially to make it a success.