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Resources for Sound Business Decisions.™

Defining a Business Buyer’s Criteria

Although a great deal of time, talent, and money can go into closing an acquisition, an acquisition is not an end in itself. A merger or acquisition is a process. A successful outcome to this process begins with the formulation of your “value drivers” and criteria, and extends beyond the closing until the desired benefits have been obtained.

Things like increasing revenues and profitability, adapting to shifting markets, responding to competitive pressures, extending global reach and gaining access to technologies are generalizations that could apply to just about any business today and are only useful when making general observations about the M&A environment.

Companies seeking to formulate their value drivers and financial criteria need to be much more specific. The critical question is: What exactly do you want to accomplish through the growth strategy of M&A? For companies with multiple strategic business units (SBU), that question should be addressed and answered for each SBU.

MoneySoft PDQ Deal Reviewer is a value-based system that helps create a more vivid picture of an acquirer’s strategic motivations for one or more SBU’s. The Deal Reviewer facilitates strategic thinking as it guides you through the process of identifying and ranking your “value drivers” and establishing the financial criteria an acquisition should meet to merit further evaluation. In addition, Deal Reviewer structures your “values” and criteria into an analytical tool that can be used to quickly screen acquisition opportunities.

Whether you use Deal Reviewer or a system of your own devising, understanding strategic motivations and defining financial criteria is a “best practice” that can be utilized to improve the overall effectiveness of a corporate M&A program, regardless of company size. The list below offers 9 reasons to undertake the process of establishing deal criteria.

  1. The process of defining strategic motivations and financial criteria facilitates strategic thinking and the development of fresh insights into the business and its future course.
  2. Decision-making is a process of “values clarification.” To the extent that a company’s values are better clarified, its decision making process is improved.
  3. Values (strategic motivations and criteria) are fundamental to rational decision-making. Without clearly defined values, decisions are made based upon available alternatives. Defining values empowers you to choose whether any alternative is appropriate.
  4. In addition to facilitating strategic thinking, formal deal criteria helps to get key personnel on the same sheet of music.
  5. Deal criteria can be used as a rejection device for situations that are a poor fit. Being able to quickly separate the winners from the losers saves both time and money.
  6. Formal deal criteria, by definition, creates a profile of the type of company that is most desirable and makes it easier to target and find situations that fit and offer the desired values. Knowing what you want makes it much easier to find it.
  7. It’s a costly mistake to allow your desire for a company to define your strategy—it should be your strategy that defines your desire for a target. It has been noted that the theory determines the observation. Successful deals have a compelling strategic rationale, but they are not “rationalized.”
  8. The forward-thinking necessary to clarify values and establish criteria can facilitate post acquisition integration by placing emphasis on “life after the acquisition,” rather than the complexities of closing the deal. It’s easier to look beyond the deal when the deal is a means and not an end in itself.
  9. Being able to act fast is important. Knowing what you want allows you to quickly recognize and respond to it when you find it. In a hot M&A market, if you take too long to decide whether to seriously pursue a deal, it might be acquired by a competitor or another buyer.

Not all strategic motivators are equal. Some are more important that others. When evaluating acquisition candidates, each motivator should be evaluated and compared according to its relative importance. The system used in PDQ Deal Reviewer allows a weight to be assigned to each motivator. The target’s perceived capacity to meet the motivation is then rated so that a weighted rating for each motivator can be obtained along with an aggregate weighting for all strategic motivators.