What are the key factors to consider when evaluating the financial viability of an acquisition target?

1 Revenue and growth

The first factor to consider is the target's revenue and growth rate. Revenue is the amount of money the target generates from its sales or services, and growth rate is the percentage change in revenue over a period of time. These indicators show how well the target is performing in its market, and how much potential it has to increase its sales in the future. You want to look for a target that has consistent and positive revenue and growth, as this implies that it has a strong customer base, a competitive advantage, and a scalable business model.

2 Costs and margins

The second factor to consider is the target's costs and margins. Costs are the expenses the target incurs to operate its business, such as raw materials, labor, rent, marketing, and taxes. Margins are the percentage of revenue that the target keeps as profit after deducting its costs. These indicators show how efficient and profitable the target is, and how much room it has to improve its operations. You want to look for a target that has low and manageable costs and high and stable margins, as this implies that it has a lean and flexible cost structure, a strong pricing power, and a healthy cash flow.

3 Assets and liabilities

The third factor to consider is the target's assets and liabilities. Assets are the resources the target owns or controls, such as cash, inventory, equipment, patents, and goodwill. Liabilities are the obligations the target owes to others, such as loans, accounts payable, leases, and pensions. These indicators show how solvent and liquid the target is, and how much risk it faces from its debt and obligations. You want to look for a target that has more assets than liabilities, and more current assets than current liabilities, as this implies that it has a positive net worth, a sufficient working capital, and a low leverage ratio.

4 Synergies and integration

The fourth factor to consider is the synergies and integration potential between your company and the target. Synergies are the benefits that arise from combining two or more companies, such as cost savings, revenue enhancement, or innovation. Integration is the process of aligning and harmonizing the operations, cultures, and systems of the merged entities. These factors show how much value the acquisition can create for your company, and how smoothly and quickly the transition can occur. You want to look for a target that has complementary and compatible products, markets, capabilities, and values with your company, as this implies that there are significant and achievable synergies and integration opportunities.

5 Valuation and deal structure

The fifth factor to consider is the valuation and deal structure of the acquisition. Valuation is the process of estimating the fair market value of the target, based on various methods such as multiples, discounted cash flow, or market comparables. Deal structure is the arrangement of the terms and conditions of the acquisition, such as the price, payment method, timing, and contingencies. These factors show how much you are willing and able to pay for the target, and how you can finance and execute the deal. You want to look for a target that has a reasonable and attractive valuation, and a deal structure that minimizes your risk and maximizes your return.

6 Due diligence and legal compliance

The sixth factor to consider is the due diligence and legal compliance of the acquisition. Due diligence is the process of verifying and validating the information and assumptions about the target, such as its financial statements, contracts, customers, suppliers, employees, and litigation. Legal compliance is the process of ensuring that the acquisition follows the applicable laws and regulations, such as antitrust, tax, labor, and environmental. These factors show how reliable and trustworthy the target is, and how you can avoid or mitigate any potential issues or liabilities. You want to look for a target that has a transparent and accurate due diligence, and a legal compliance that meets or exceeds the required standards.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?