When examining a business you are considering buying, one factor will be paramount: what is its scope for growth? After all, an acquisition doesn’t make much strategic sense if it can’t deliver growth, even if growth is something that might take a year or more to achieve.
Reliably gauging the growth potential of a target business can be problematic, though, particularly during a pre-acquisition period in which the focus may be on financials, due diligence and planning for post-deal integration.
However, there are several basic metrics that can be examined that should provide a solid overview of whether the business is primed for sustainable long-term growth or will require a comprehensive turnaround in order to deliver profitability.
Understand and leverage demand
Crucially, you will need to examine a target’s customer base, helping you gain an understanding of the demographics, spending patterns and preferences that the business’ customers have. Analysing a company’s customer base, for example through a poll, can help to provide invaluable information regarding which parts of the business have potential for further growth.
Identifying areas of high growth potential will mean you can begin planning some potential growth strategies in advance, which could subsequently help you to unlock growth and profitability sooner after the acquisition has closed.
How could the business diversify?
Growth can also be attained by moving the business into areas that are outside of its typical product or service offering, but that have similar markets and customers. For example, a building materials firm could look to move into tools and DIY, allowing it to grow its market share and customer base.
It will be important to determine how this diversification is going to be attained. For example, will the business organically expand into a new area by developing its own new products/services and hiring new staff? Or will it take the quicker route and diversify through acquisition?
Assess the competition
It will also be vital to look at the target firm’s competitors, which will help to highlight the areas in which growth could be at risk in the post-acquisition period. Assessing the competition should involve a close analysis of similarly sized businesses in the same sector, marketplace and region.
As well as flagging up how the business’ growth prospects might be hindered by local competition, analysing competitor companies can also show potential areas for growth, for example unexploited niches that could be used to gain market share.
Are the businesses complementary?
Of course, one of the key elements to ensuring post-sale growth is to establish whether your existing business and the target business are complementary. Does acquiring the company align with your company’s growth strategy and aims? Is your company’s business model suited to exploiting the growth areas you’ve highlighted at the target business? Asking questions such as these will be critical to ensuring you choose an acquisition that can truly drive growth across your business.