Mergers and Acquisitions: How To Identify Potential Acquisition Targets

Knowing how to identify promising merger and acquisition targets can help minimize some of the risks that mergers might pose to companies.

Mergers and acquisitions (M&As) are beneficial to investment firms and companies for many reasons which include the exciting opportunity to profit from and expand into other markets. When investment firms and other organizations purchase and acquire companies as acquisition targets, those entities become subsidiaries. While there are reports of problematic mergers and acquisitions because of bad decisions, M&A transactions continue to grow. It might be part of your business plan to embark on an M&A journey, but it does not come without its risks and challenges. One of the crucial groundwork steps in the M&A process is establishing how to successfully identify potential acquisition targets; or how to set your business up as an attractive partner in your industry.

If you want to explore an acquisition target, it is vital to have the right strategy.

Also read: M&A: Understanding Due Diligence for Emerging Enterprises

What Makes-Good-Acquisition-Target

What makes mergers and acquisitions attractive to potential partner organizations is an entity with related acquisition-driven skills and industry knowledge. A corporation or an investment management firm may look for diversification to create value which could lead to a free cash flow for the acquisition target and acquiring entity. However, the realized cash flow for both companies must be more from the investment portfolio or the smaller viability with portfolio investment in the two entities.

Financial analysts and CPAs are essential partners in your M&A journey as they are experts at identifying and screening acquisitions using various systems for evaluating potential acquisition candidates. Their role is to help you identify whether acquiring a certain company will bring added value to the shareholders.

Acquisition Target Selecting Criteria

Screening a potential acquisition utilizes a strategic approach that requires developing criteria that will limit potential targets to a number of up to five. Letting a certified public accountant design the acquisition target selection criteria for acquisition targets can help with successfully closing the M&A transaction following strict guidelines, including:

  • Corporate Risk Profile Analysis
  • Corporate Audit (Strengths and Weaknesses)

Generally, the acquisition criteria include revenue and constant cash flow, specific industry sectors, investment preference, and other criteria. Listed below are some acquisition examples to provide you with an understanding of the scope of work CPAs and financial analysts, when it comes to vetting potential acquisition targets.

Five Significant Acquisition Vetting Examples

1. Profitability & size to determine the acquisition cost.

2. Similar activities, offerings, products, expertise, or services.

3. Authentic synergies opportunities to make profitable companies.

4. Geography or region the acquisition target has positions in.

5. Customer segments, enabling access to new customers that strengthen positions with the existing customer base.

Characteristics of Attractive Acquisition Candidates

  • Growing Markets Participation,
  • Established a Proprietary Position in the Markets,
  • Sales up to $50,000 or more,
  • 10 percent or more Investment Return Possibility,
  • Earns a Satisfactory Gross Profit Market in Sales,
  • Activities in Patents, Technology, Proprietary Pharmaceuticals, Copyright Products, Etc

M&A Target Screening Criteria

Target screening is the process through which you sift through all potential targets to narrow them down to only the most viable acquisition options.

Measuring the successful outcome of a selling company is used for setting the M&A target screening criteria, which focuses on internal and external aspects. Internally, mergers and acquisitions receive measuring by limited time variables, cost, and scope to determine operational value. During the implementation and handover phase, external aspects receive measurements to assess the M&A target’s achievements, stakeholder satisfaction, organization benefits, and stakeholder-community benefits.

Identifying Viable Acquisition Targets

Target screening is an important part of the M&A process as it helps you to narrow down your list to consider only the most viable acquisition targets. When recruiting M&A services, the following M&A target screening processes should take place to help you refine your shortlist:

  • Business Valuation
  • Marketing Material Creation
  • M&A Strategy Insight and Negotiation Skills
  • Due Diligence
  • Business Marketing
  • Confidentiality Contracts
  • Conduct Interviews with Acquirers

If you have decided to embark on an M&A process for your business, Fusion CPA can assist.

We offer accounting, tax, financial planning, business advisory, M&A services, and software solutions. We serve the CBD, cannabis/hemp, law, real estate, e-commerce, entertainment, technology, and market industries. Since 2011, our CFO, CPA, Financial Advisers & Analysts, and M&A experts team continues to offer assistance in resolving tax, accounting, mergers, and acquisitions problems. Our reputation in Atlanta made us the 2022 Best Accountants in Atlanta by Expertise.com.

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