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The Wrong Place to Start an Acquisition Process

August 11, 2014

Many people begin by listing possible companies to buy. But there’s a far better approach when you’re planning an acquisition.

You start getting excited about a target company that has fantastic financials and is growing exponentially. You imagine the synergies the deal will generate. Success is so close you can almost taste it…but after digging a little deeper, you discover the company is operating in a shrinking market. In fact, over the next five years, demand for this market’s products and services is expected to drop dramatically. By looking at future demand, you now realize that the company’s past growth cannot be sustained. Your prospect has gone from a gold star to a dog and after all your initial enthusiasm, you’re back at the beginning.

Following Demand

This pattern is all too common when people embark on an acquisition, and it’s exactly the reason why I recommend looking at markets before looking at companies.

The main benefit of a “markets-first” approach is that it allows you to identify and follow future demand. What your customers or potential customers will want in five or even ten years is key to any company’s success.

We can all think of businesses that succumbed to shifts in demand – from cigarette companies to video rentals to brick-and-mortar bookstores. Even if you manage to capture more market share, your business may actually be declining or stagnant if market size is decreasing.

It’s difficult to grow when you’re fighting over pieces of a shrinking pie. By researching markets first, you can follow future demand and make sure you’re buying a prospect in a growing market.

Find Relevant Prospects

If you consider not-for-sales companies, as well as those on offer, you can also establish a large, yet relevant choice of possible acquisition prospects. This ensures the prospects you consider for acquisition are in attractive markets that meet your strategic criteria.

There’s no wasting time and resources researching an individual prospect for months only to discover it doesn’t match your acquisition strategy. Researching markets first screens out prospects that are not aligned with your acquisition strategy.

The Markets First Approach

When researching markets, first determine how you want to define “market” – geographical, vertical, or whatever best fits your business. Next, look where future demand lies. You and your acquisition team can brainstorm markets that have future demand and are aligned with your acquisition strategy.

Establishing Criteria

Next you can begin crafting your market criteria in order to objectively prioritize the markets against your acquisition strategy. Criteria can include market growth rate, market size, geography, customers, or key players. It’s best to pick six criteria – too few and you won’t cover all necessary aspects, and too many will cause you to lose focus. Remember, your criteria should always be rooted in your overall acquisition strategy.

Begin your research at a high level and then progressively zero in on individual market segments you find attractive as you gather more information. As your research progresses, you’ll have a better understanding of the markets. Make sure to use your criteria to remain objective.

Watch: Can you demonstrate your value to the organization?

From Markets to Prospects

Market research and understanding the market dynamics helps you enormously when it comes to evaluating individual prospects. For example, if customers in a particular market are trending toward a certain technology, you ensure that any company you consider possesses the technology that meets that growing demand.

Once you’ve completed your market research, you’ll have a much better understanding of the market dynamics and be able to better identify and evaluate individual prospects. Although the markets-first approach is different from the norm, it enables you to follow demand, remain strategic, save time and resources, and increase your overall chances of a successful acquisition.

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About The Author

David Braun is the founder and CEO of Capstone, which he established in 1995. He created the company to meet the unique demands of mid-market companies and their corporate growth initiatives. Braun is the author of Successful Acquisitions: A Proven Plan for Strategic Growth (AMACOM, 2013). He has more than 20 years’ experience formulating growth strategies in a wide range of manufacturing and service industries. Contact him on Twitter at @CapstoneStrat.

2 Comments »

  1. avatar

    […] By looking at future demand, you now realize that the company’s past growth cannot be sustained. Your prospect has gone from a gold star to a dog and after all your initial enthusiasm, you’re back at the beginning…Continue reading this post on AMA Playbook. […]

  2. avatar

    very Nice post, having very usefull tips.

    thanks…….

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