Highly acquisitive companies as well as institutional private equity funds review numerous acquisitions on a recurring basis. But only a select number of target companies are ultimately pursued. This is because acquirors must have a high degree of confidence in the ability to create and realize future incremental value as a result of the acquisition.

Many acquiring companies ultimately ascribe value to acquisition targets based upon the projected risk-adjusted returns on investment. One of the most critical elements to enhancing returns is future growth in the acquired company’s business, principally through revenue and operating profit expansion. Acquirors must be able to expand a target’s operations either organically or through additional tuck-in acquisitions in addition to realizing revenue and expense synergies on a combined basis. Creation of future incremental value and strong return on investment are important facets of the decision matrix and depend on a number of factors such as:

  • Growth in revenues and profitability
  • Strong barriers to entry and industry-leading core competencies
  • Minimal and fragmented competition
  • Minimal customer concentration
  • High-quality products/services
  • Product/service diversification
  • Strong reputation among customers
  • Talented senior management and committed employees

The aforementioned factors greatly affect the amount of acquiror interest and ultimately valuation levels. Quite often the companies that exhibit such attributes are appropriately rewarded with relatively higher valuation multiples.