Things to Look for in an Acquisition
The quickest way to increase the profit margin of a business is to streamline expenses and take care of the low hanging fruit to bring in additional sales.
So naturally, when looking to acquire a business you should find one that targets these opportunities in synergy with your strengths.
Let’s break this down.
1) Streamlining expenses. If a P&L shows heavy payroll and you have software or technology that helps increase automation, you have an opportunity to streamline a heavy expense and increase the profit margin.
If a P&L shows marketing expenses from Google AdWords as very high and you have hundreds of thousands of email subscribers that can achieve similar high quality traffic without compromising systems, this should be quite a good opportunity for you to help decrease bloat.
Look for businesses that tie in to what you already have, that they are lacking.
2) In terms of low hanging fruit, there are probably several opportunities you can take advantage from A/R, advertising, current clients, upselling, etc. Maybe there is a way to incentivize clients to pay accounts receivables in advance, or maybe you can offer an upsell product at a discount to current clients. Maybe you have a buyer lined up in another business of yours, where you can sell off inventory that is not producing much profit. It is good to analyze where this current business ties in to your current ecosystem, if possible.
On the other hand, if you are looking to get into a new industry altogether, try to do homework in that industry before seeking deals so you really get a feel for things going in to the acquisition. Nevertheless you still want to utilize your skillset in a useful way to enhance the sales of the business and increase the profit margin, if possible.
After you buy the business, it is good to analyze what the current owner has not taken advantage of. You want to get the general gist of things that has not been taken advantage of before during your due diligence, and then really dive in to what strategics to take advantage of.
You have to naturally weigh how time consuming it is to implement these protocols.
You also want to analyze the fundamentals of the business.
Are the bones good? This would meaning that the lead gen system is quality, the customer retention is high, and the sales system that is in place is solid to continue?
How owner dependent is the business< while still understanding that the business was created by the owner
Can the handoff and transition be smooth, meaning that the business won’t decline just because there is new management?
You cannot be overly picky because then you won’t have any deals or deal flow, but you have to have a broad checklist that matches and you have to be somewhat flexible with your checklist if you are looking for a good deal and for increased deal flow.