The first step in any acquisition process should be to document the criteria which a valid target company must meet. It is better to start with as much focus as possible. The criteria can then be widened or relaxed if insufficient targets can be found.
The 3 most important aspects which should be covered by acquisition criteria are:
- Nature of business – (SIC designation/s will be useful to have)
- Size of business
The determination of the size of the business will be based on the Gross Budget (‘GB’) which the acquirer allocates to the project. In this context, ‘gross’ means to include both the acquirer’s cash resources and, if it fits in with the acquirer’s strategy, the level of debt to be added – typically, this will be expressed as the ‘level of gearing’.
In some (but by no means all) cases, when a business is advertised for sale, a Guide Price will be provided and it can quickly be determined whether this falls within the acquirers GB. However, where a Guide Price is not quoted, usually either or both the level of Sales and/or EBITDA will be quoted. Once the GB is known, assuming the target is being sold as a going concern, this can be translated to determine the likely target financial profile as follows:
Target EBITDA likely to be in the range: 33% x GB (‘Hi EBITDA’) to 25% x GB (‘Lo EBITDA’)
Target Sales likely to be in the range:
Lo EBITDA x (1/S) S = lowest likely % EBITDA for target
Hi EBITDA x (1/T) T = highest likely % EBITDA for target
It is important to remember when setting the GB that the Target may require investment over and above the amount required for the acquisition.
Anderson Shaw provides acquisition support services. If you are planning an acquisition and would like to discuss how we may be able to support you through the process please contact us.