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Work Place | EXECUTIVE ROUNDTABLE

Narrowing Criteria Will Simplify Hunt for Acquisitions

September 02, 2002

Executive Roundtable is a column by TEC International, an organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems in a round-table session. The following question and answer summarize a discussion at a recent TEC meeting in Southern California.

Question: We recently decided on acquisition as a long-term growth strategy. We have a general idea of the kind of company we'd like to acquire, but we're not sure whom to approach or how to approach them. What do you recommend?

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Answer: Before worrying about where to look or how to approach them, first get clear on what you're looking for. Acquisitions involve complex, time-consuming deals. If you go chasing deals without any parameters to limit the scope of your search, you're likely to grab at the first opportunity that comes down the pike. In doing so, you greatly increase your chances of making a deal that's bad for you and your business.

Terry Gambill, president of the mergers-and-acquisitions consulting firm Terry Gambill and Associates in Geneva, Ohio, has acquired more than 20 companies and product lines. He recommends developing a one-page "acquisition criteria sheet" to guide your search for acquisition candidates. Start by identifying who you are as a business, what you do and where you do it. Then list your company's core competencies, the things you do that give you a distinct advantage over your competitors. Finally, describe how your company is financed and how you intend to fund the acquisition.

Next, list in bullet-point fashion the primary characteristics of the company you're looking for. This should include the type and size of business, where it could (or should) be located, whether you want to buy part or all of the business and whether you want to acquire people, places or things or stand-alone business units. If you can't fit this information on one sheet of paper, you haven't clearly defined your acquisition criteria. Sharpen your pencil and try again.

When creating the sheet, make your criteria narrow enough to keep you away from diversionary acquisitions but not so conservative in size and scope that you eliminate all candidates. Also, don't underestimate the size of the company you think you can acquire. It takes the same amount of management time and professional fees to do a $10-million deal as a $1-million deal.

Why go to all this trouble? Because a well-crafted acquisition criteria sheet keeps you focused on the right candidates. It lets your management team know exactly what you're looking for (so they don't bring you inappropriate opportunities) and helps you approach potential sellers by showing why you have an interest in their particular business.

Perhaps most important, it keeps you from chasing after deals that never should have come to you in the first place.

"Once you go into acquisition mode, all kinds of opportunities will suddenly present themselves," Gambill explains, "and you can't afford to waste time looking into every potential deal that comes your way. The one-page criteria sheet serves as an effective first screen. When something lands on your desk, simply pull out your sheet and run down the list. Within 30 seconds you can tell whether the opportunity might be worth pursuing."

Once you have clear, concise acquisition criteria, you can turn your attention to finding potential candidates. At this stage, keep your eyes and ears open because acquisition candidates can turn up in many different places. Start by going up or down the vertical integration chain in an industry that interests you.

For example, if you want to buy retail lumberyards, develop a relationship with a lumber wholesaler. The wholesaler can tell you about the company where the partners are looking to retire or the struggling firm that just laid off 20% of its work force.

Customers or distributors often can point you in the right direction. Ask them, "What other products or services would you like us to provide for you, and what companies do you know that provide them?" Check in with your vendors. They will know which firms in your industry might make likely candidates for acquisition. Take the top salespeople in your industry to lunch or dinner. They often have insight and information on where promising opportunities lie.

Of course, don't overlook the Internet, where a growing number of sites list businesses for sale. Many of these focus on mom-and-pop-type businesses, but several offer information on mid-market companies. Most of these sites will let you search by category and/or region, and many allow you to sign up for e-mail to notify you of new businesses for sale. Some charge a fee for their services; others are free.

Finally, get out and press the flesh. Make yourself visible at trade shows and industry gatherings. Let people know that you're looking, and news of opportunities will find its way to you.

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To learn more about TEC, visit www.teconline.com.

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