The guiding principles for acquiring an existing business are synergies, value and balance.
Synergies must be created between the two merging companies, or between the buyer and the acquired company.
Ideally, the merging companies should have similar or complementary product or service ranges, and their marketing and sales methods should be in harmony.
Synergies are to be created in three areas:
- Marketing and sales (new products and services, new customers or new markets should lead to revenue growth)
- Operations (obtaining discounts, improving means and methods of production and delivery of products and services)
- Finance and administration (the merger or acquisition should improve cash flow and lead to an increase in the number of projects)
Without synergy, no acquisition should be envisaged
Value, on the other hand, refers to the ability to generate profits and cash flow. Profits and cash flow create value and stimulate growth: profits generate equity, which in turn increases value, and cash flow increases working capital and consolidates day-to-day operations.
A company that does not create value should not be acquired.
Read also: How do you calculate a company's real value?
Striking the right balance
To strike the right balance, you need to find the right middle ground. As far as synergies are concerned, the acquisition must be feasible both operationally and financially. In other words, a very small company shouldn't acquire a very large one, and a company that makes widgets probably shouldn't acquire one that makes clothes.
Another type of balance lies in the ability to create value: the investor must be able to offer added value to the acquired company, and vice versa.
An acquisition that does not create a balance, positive synergy or value should be avoided..