You have put a best-in-class management team in place, updated your systems & processes to support growth, and established the right company culture. Now you are ready to take your business or investment to the next level by making add-on acquisitions.
Private equity firms and strategic buyers see more investment pitches and potential targets than they can count. After screening some appealing targets, there are oftentimes only a few that appear to be a cultural and strategic fit. Once identified, every investor and business should ‘look under the hood’ to ensure they truly understand what they are buying.
Key items investors and businesses should consider when evaluating an add-on acquisition:
Financial Due Diligence
If the target does not have a qualified CFO or controller, their financials are often messy. Sellers commonly mishandle entries, such as revenue recognition and inventory, that impact the bottom line, so it is important to perform financial due diligence to verify the target’s numbers.
Financial Models & Forecasts
Target companies usually present a management forecast to investors. It is common that these forecasts are the ‘best case’ scenario or very ambitious. Investors should understand what growth assumptions were used and if they are realistic. Accurate forecasting is a critical component in calculating your return on investment, which will ultimately drive your decision to execute the acquisition or not.
Securing Capital for the Acquisition
If you need outside capital to fund the acquisition, your team will need to provide detailed financial reports and analyses that support your investment thesis and growth plan. Likewise, the target will need to produce organized and accurate financials. Hiring outside support, such as CFOx, during the transaction process is recommended for investors and sellers.
It is never too early to start thinking about post-transaction integration. Evaluating the target’s current systems and developing a plan to efficiently integrate their systems & processes into yours is critical to ensure your acquisition gets started on the right foot.
If you would like to learn more about how CFOx can help your firm or business during the acquisition process, please schedule a free consultation via email ([email protected]) or by scheduling a call directly on our website homepage.