Blog: Why Your Good Company May Not be a Good Target for a Buyer

A good company unfortunately may not necessarily be a good acquisition. A business can have strong revenue growth, attractive margins, capable management and a solid competitive position, but buyers should also consider the purchase price, risks being assumed and the returns that can reasonably be generated following the acquisition. Many times, even an exceptional company can become an unattractive investment if acquired at too high a valuation. This sounds obvious, but it’s not, particularly in a competitive deal market where investor discipline sometimes accidentally goes by the wayside.

Buyers should try to look beyond reported EBITDA to understand cash flow, working capital and capital expenditure requirements, customer concentration, the quality and sustainability of earnings, and the company’s ability to operate without continued dependence on its owner. In reviewing a target, buyers should try to determine whether there are credible opportunities to grow revenue, improve margins, strengthen operations or otherwise create additional value following the acquisition. Understanding these concerns can significantly help a seller understand where a buyer is coming from on a transaction and getting a deal closed.

Internally, buyers are answering two different questions: Is this a good company, and is it a good investment at the proposed price and terms? The answer to the first can be yes while the answer to the second is no. When reviewing a potential corporate acquisition target, business quality matters—but so do price, risk and the opportunity to create future value.