Published March 24, 2011

What Makes a Good Acquisition Candidate?

By Paul Wormley

My partners and I are frequently asked this question by small business owners and their advisors.  In most cases, they are looking for a list of specific characteristics to determine if their company is ‘desirable’. But there is actually a much more important question that needs to be answered to determine if a company is a good acquisition candidate: is the company actually for sale?

Hadley Capital has a standard list of ideal characteristics that we look for in an acquisition target – proven management team, proprietary product line, etc.  –  and consider these as table stakes.

But ask any good business broker or investment banker and they will agree that the most important criteria is whether the company is actually for sale. That’s because it’s hard to buy or sell something that isn’t actually for sale (and most intermediaries don’t get paid unless there is a transaction).  The most common reasons a business isn’t actually for sale is because an owner has unrealistic expectations about value, is not emotionally committed to a sale or hasn’t prepared the company for sale.

Valuation – According to many small company intermediaries, the #1 reason most businesses don’t sell is because they are over priced – owners do not have realistic expectations about value.  One business broker, Toby Tatum, even wrote a book about it. Valuations can vary widely based on industry, growth rate, customer concentration, etc. but a good advisor can help a seller develop a realistic range of valuations for hisor her company. NYTimes author and blogger Barbara Taylor (herself a business broker) covers it pretty well in a post on NYT's Your the Boss blog. Hadley Capital has an overview of small company valuations on its website.

Emotions – The sale of a small company can be a highly emotional affair. There is a reason owners consider their business to be ‘their baby'. A buyer needs to get comfort that there is a compelling reason for a sale and confirm a sellers’ honest appraisal of their commitment to sell. When a buyer asks a business owner, “What are you going to do after you sell your company?”, the buyer is not just making small talk, she is trying to better understand a seller's emotional commitment to sell.

Prepared – Poor preparation can create a number of problems in completing a sale.  If financial and tax records are not in order, the due diligence process can become drawn out, ‘deal fatigue’ can set in, a buyer may get cold feet or require a purchase price reduction, all of which can jeopardize a deal. Barbara Taylor wrote another good post on preparing a small company for sale.

So, is the company actually for sale?

Paul Wormley - General Partner

Paul joined Hadley Capital in 2005. He has spent his entire career working with small and emerging companies. Paul grew up in a family business environment and is an owner of his family’s community newspaper business. Paul works with GT Golf Supplies, Pneu-Con, Open Sky Media and Centare. He was the chairman of the board of directors for i-deal Optics, a previous Hadley Capital company.

Paul is an outdoor enthusiast who enjoys fishing, hunting, riding motorbikes, Crossfit and an occasional craft beer. He works closely with a number of non-profit organizations including One Acre Fund and Trout & Salmon Foundation, and serves as chairman of the Finance Committee at his church.

Paul is a graduate of the University of Colorado at Boulder and received an MBA from the Kellogg School of Management at Northwestern University. He and his wife, Rosemary, have three children.