How to assess an acquisition target before committing

A target can look attractive in an introductory presentation and still require hard questions before a buyer commits time and capital. A structured assessment helps the buyer understand what the business does well, what could threaten the investment case and whether the acquisition advances the strategy that prompted the search.

Assessment is not a single spreadsheet or a checklist applied identically to every company. The questions should reflect the target’s industry, business model and the buyer’s objectives. The central discipline is to distinguish verified facts from assumptions, and to understand how unresolved issues could affect value, structure or the decision to proceed.

Test strategic fit first

Start with the reason for considering this target. Does it provide the capability, customer access, geography or market position the buyer is seeking? Is the rationale supported by evidence about the target and by a plausible plan for combining or operating the businesses?

A target may have strong standalone performance but limited strategic relevance to the buyer. Conversely, a business may appear modest on its own but offer a capability the buyer could not efficiently develop internally. The buyer should be clear about which case it is making and how it would create value after acquisition.

G&G’s buy-side service describes assessment against strategic objectives, valuation, financial performance and key risks before the buyer commits further time and capital.

Understand the quality of performance

Review historical results and the drivers behind them. How consistent is revenue? What explains margin movement? Are forecasts built from supportable assumptions? Which costs or earnings adjustments need evidence? The goal is to understand the performance of the company as it operates today, not to accept a growth forecast without testing its inputs.

The relevant evidence depends on the business. A service company may require close attention to client retention, contract terms, staff capacity and utilisation. A manufacturer may require a view of plant condition, input costs, working capital and production concentration. G&G’s industry overview provides examples of sector factors that may shape an acquisition review.

Examine customers, contracts and dependencies

Customer concentration, supplier reliance and key-person dependence can affect the durability of the business. Ask how important relationships are secured, who owns them, what agreements govern them and what could cause them to change. The presence of a large customer is not automatically a flaw; the buyer needs to understand the nature and resilience of that relationship.

Operational dependencies matter as well. Consider whether essential knowledge, permissions, systems or decisions sit with one individual. Explore management depth, hiring needs, employee retention, technology, compliance and any obligations that could transfer to a new owner.

Separate risks from deal-breakers

Not every concern should end a discussion. Some may be addressed through further diligence, a change in price or structure, a transition plan or an operational improvement after completion. Other issues may undermine the strategic case or create risk the buyer is unwilling to accept.

The buyer should record open questions, evidence needed, who will investigate and what decision could change as a result. This prevents diligence from becoming a collection of documents without a clear connection to the acquisition decision.

Value the target to your business

Valuation should reflect the target’s performance, risks, market position and the value it can create for the buyer, while remaining disciplined about assumptions. Synergies may support a higher value to one acquirer than another, but they need to be plausible, measurable and achievable. The buyer should understand what it is prepared to pay and which risks or conditions would alter that view.

Build a diligence plan around decision-changing questions

A diligence plan should distinguish routine information gathering from questions that could change the buyer’s view of the deal. For each issue, identify the evidence required, the person responsible for reviewing it and the consequence of different answers. For instance, a contract question may affect the expected duration of a customer relationship; a management dependency may change transition planning or the investment required after completion. The point is to connect the fact to the commercial decision.

Keep an issues list that records what is known, what remains uncertain and what action will resolve it. If a concern is confirmed, consider whether it can be addressed through a condition, structure, price adjustment or post-completion plan, with professional advice as appropriate. If it undermines the strategic rationale or creates unacceptable exposure, the buyer may decide not to proceed. That is a legitimate outcome of disciplined assessment.

This article is general commentary for Australian business owners and does not take account of any particular business, its circumstances or its objectives. Any figures, ranges and examples are illustrative only and are not a valuation, an appraisal or advice on your business. Advice on a specific business is given only through a confidential engagement with G&G Advisory Partners.