After you've got some prospective acquisitions identified based on type and size of business, take a look at the profit picture of each. You want a company which has shown increasing profits over at least the past three years. Look for a trend, rather than a sudden spurt of profit growth. Comb through their books with a lice comb!
Then invest in an acquisition audit by your accountants. (…) If you have already made a tentative offer, and your own audit indicates your offer is too high, adjust it. If your prospect protests, just tell him what he already knows - that the numbers your audit revealed did not agree with his and do not support your initial offer.
Your capital source, especially investment bankers, will want your annual return on investment, after you take your salary and make debt payments, to be about 35%. Regardless of where you get your funding, you should accept nothing less in ROI than 20%. Of course there are acquisitions you may consider that have no profit but which you might be able to turn around, but I would be hesitant unless I had a couple of buyers tucked under my belt. (…)
Check court records for outstanding lawsuits or claims against the company or companies in which you have interest. Investigate the owner and senior management. Are they honest? Are they who and what they say they are? Look for red flags. And don't ignore red flags because you want the acquisition so badly. Be willing to walk away from the most promising deal if a flag pops up. (…)
Once you've narrowed your search to one or two companies, and you've made contact with their owner, it's time to talk to key management people. If and when the company is purchased, do they plan to stay? Or is their primary loyalty to the former owner? In instances where highly technical processes are involved in manufacturing, how do the skilled technicians feel about staying on? These are vital issues because existing customers look for continuity.
The fact is - everybody wants continuity. Especially you. Continuity of operations, and the strength of that continuity to generate increasing profits, is what you're buying. A Quantum Leap is actually a direct leap from zero to full profit-making capacity, giving you the opportunity to skip all the growing pains in between. And your ability to convince employees, suppliers and especially customers that nothing will change after the buyout, and make them believe you, will do more than anything else to get your money's worth out of the new company. Unfortunately, every predatory corporation which buys out a competitor grins and says, "We have no plans to make any changes in personnel or operations at this time." Besides, you may have better Vice President waiting in the wings. So the best you can do is create the perception of continuity, and feed it to those who need it.
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