5 Things Corporations Look For When Considering An Acquisition

December 04, 2019

We talk with a lot of CEOs that are angling their companies to be an attractive corporate acquisition. Regardless of industry, here are 5 key attributes that corporations look for when acquiring a company. This is by no means a comprehensive checklist of what a company needs to achieve to be acquired, however it should offer you some insight into how the merger and acquisition departments of major corporations view acquisition targets and how you can incorporate this knowledge into your business planning.

The company value and acquisition price will vary based on which of these attributes a company possesses and how they can be leveraged by the buyer. The stronger your company is in each of these areas, the more valuable your company will be.

Top 5 attributes corporations look for in acquisition targets

  1. Engaged customer/user base
  2. Brand recognition
  3. Profitability and cash flow:
  4. Product, content, or intellectual property (IP)
  5. Talent

1. Engaged customer/user base

Every business needs customers, and it often makes financial sense to acquire new customers by means of a business acquisition. In today’s metric driven marketing world, it’s fairly straightforward for a company to calculate the price of acquisition of a new customer (ex: cost and success of Google, Facebook, or email, campaigns). Understanding what your customers are worth to your bottom line, and what they are worth to the company making the acquisition is the key to determining a fair purchase price. Note that the monetary value of a customer to your business will likely be different from the value of the same customer to the purchasing company, as they may have a larger portfolio of services and goods and different revenue models that they can leverage to bring in even more revenue from each customer. In technology acquisitions, the key word when talking about customers is engagement. The value and stickiness (i.e. loyalty) of your product to a customer goes up the more engaged they are engaged with your product. A customer that uses your product daily is often more valuable that one who uses your product weekly, monthly, etc.

2. Brand strength

This one is self explanatory. Some brands are so strong that the mere mention of them conveys specific attributes: quality, great taste, reliability, etc. The strength of the brand is closely tied to other attributes in this list.

3. Profitability and cash flow

As the saying goes, cash is king and corporations are looking for ways to increase their profitability and cash flow. Cash is the most straightforward way a company value can be set, usually at a multiple of revenue, with the multiple determined depending on profitability and future growth potential. Even if your business does not have any of the other attributes in this list, if you’re consistently making money and will continue to do so for the foreseeable future, for the right price, your company will be a strong acquisition target.

4. Content, product, or intellectual property

Owning the patent(s) on a desirable technology, have a large collection or propriety content, or have years of R&D put into a product that another company will need to spend money and time developing, will make your company a strong acquisition target to the right company. This can come in the form of a company buying a competitor or a larger company looking to broaden it’s portfolio and acquiring a company with an existing product or IP the the new area it wishes to enter. The acquisition will allow the buyer to forego years of R&D and cost and enter the market with a head start. In the case of purchasing an existing product and/or R&D unit, corporations will look beyond the product and evaluate the cost of integrating the acquisition into their existing processes and systems. This is particularly important for tech companies, where the cost of software integration can make or break a deal.

5. Talent

Talent is a common acquisition reason of small companies in the technology sector. In this case, a larger company would acquire a smaller company (generally in the order of 1-5 people, but it really can be any size) in order to secure the employment of one, several or all of the existing employees. The acquisition would be contingent on the employees signing on with the new company for a specified period of time, with payout incentives at specific times, often on the year anniversary mark (or later). If they leave before that milestone, they don’t earn their payout.

Prospectus.com is a leader in prospectus and private placement memorandum writing services