Identifying Target Companies

How to Buy a Business by Identifying Target Companies to Acquire 

When you’re thinking of expanding your company through acquisition, you’ll need expert guidance through the seven main phases of a successful acquisition strategy. These phases include:

  1. Define your acquisition strategy 
  2. Identify target companies
  3. Build a business case and develop financial modeling 
  4. Due Diligence
  5. Deal Structure negotiation
  6. Sign and close
  7. Post-close integration

In our previous article in this seven-part acquisition series, we focused on how to define your acquisition strategy. Now that you know how to create an expert acquisition plan, it’s time to move on to the next step: identifying target companies to purchase. To make sure you target companies that meet your acquisition goals, learn more about how to identify the right businesses, and the main benefits of expansion through acquisition.

What Are the Benefits of Expansion Through Acquisition?

If you’re still deciding if expansion through acquisition is the right approach for growing your business, review some of the top benefits of this expansion strategy below:

  • Higher profits
  • More opportunity to diversify your regions, markets, and services
  • Improved revenue streams and increased customer base
  • Raised company value
  • Better opportunities for existing staff to increase their skill sets and grow professionally
  • Greater business exposure to a larger audience of clients and talent

How to Target the Right Businesses to Buy 

Figuring out how to acquire a business that is a well-fitting acquisition target and then getting them to the table is both an art and a science. We recommend starting with a list of known companies that you think align with your current company’s culture. It’s also best practice to prepare a target list of businesses that align with your firm’s overarching values and growth goals. Due to the time it takes to research this information properly, most firms outsource this work to a professional services team.

To help you determine which potential acquisition prospects should move on to the next stage of the assessment, you should also utilize clear metrics at each stage of the process. Examples of these metrics can include a target company’s geography, employees, services, offices, revenue, market share, and expertise. With these metrics, you can more easily determine the prospects you can remove from your list and those you should actively seek to acquire.

What to Ask & Do When Developing Business Acquisition Possibilities

Once you’ve used your unique metrics to judge prospects, it’s time to begin talking with your top targets. In this stage of target identification, you’ll  meet and vet businesses for fit based on your acquisition plan. Find out more about how to properly develop these targets and then meet with them below:

  1. Develop Targets

Before you meet with a target, you’ll want to begin developing a relationship with them first to find out if they’re a good fit or even open to selling. For example, you can use this stage to find out if the seller is on the market or not. If so, do they have a broker? If not, you will need an approach to open the dialogue.

  • When talking with sellers, you should screen for cultural fit and gather information that includes things like:
    • Leadership exit strategy of selling firm
    • Ownership breakdown and partners
    • Second-tier leadership
    • Breakdown of services
    • Annual revenue and profit
    • Potential risk factors
    • Litigation issues
    • Brand

The target development phase is not the time to ask for all the information you will want to see in detail. It is wise to gather enough information to see if a potential Letter of Intent or Term Sheet (non-binding) will be offered to the seller. Once that information is received and value is agreed upon, you will have ample time to review all information during the due diligence process to confirm the high-level data provided.

2. Meetings

The next identification stage to consider is meetings, but how do you navigate this effectively? To strategically buy a business, you should always execute a mutual non-disclosure agreement (NDA) before meeting with the seller. During the introduction meeting, keep the meeting attendees to a minimum. Don’t bring your entire M&A team in on day one. This approach could be intimidating to the seller, and if they’re not a good fit, a waste of resources.

The goal of the first meeting is to determine if there is enough interest between the two parties to continue the conversation. Ask questions about values, why they are selling, who their ideal buyer is, who handles business development, capabilities of second tier leadership, and what plans they have post-transaction.

If you are interested in continuing to pursue the prospect, begin gathering additional detailed information related to their financials and organizational structure. Ask them questions like, are your contracts assignable, and are you aware of tail coverage? During your discussions, there will be high-level topics that will lead to additional questions before you can begin the valuation and modeling process.

Choose Thinc Strategy for Business Acquisition Identification Assistance

Now that you know more about how to buy a business, it’s time to work with a business acquisition team who can help you identify the right business acquisition targets and assist with every step of the process. At Thinc Strategy, our team is ready to help you identify targets matching your values and acquisition goals. Besides assisting with finding the best targets possible, our team can guide you through all seven steps of acquiring a company.

If you’re interested in our advisory services for mergers and acquisitions, please contact us today to receive a free consultation. Also, stay tuned to learn more about the next topic in this series — developing a business case and financial modeling.