Growth Through Acquisition: How Should I Proceed with a Target Company?

You’ve decided to grow your business by purchasing another business or target company – an acquisition – a great option to increase revenue exponentially. Alternatively, you may have considered a merger, which occurs when two companies combine to form a new company. 

Last time, we discussed how businesses can find an acquisition target company through on-market or off-market search. Read our previous blog post: Growth Through Acquisition: How Can I Find an Acquisition Target Company? 

After some time searching and filtering through options, you’ve found a target company that interests you.  So, what should be the next steps in your M&A process? 

After creating an acquisition strategy and locating a target company, you’ll want to address these other initiatives as well:

  • Vet target companies
  • Analyze valuation assessment for target
  • Submit a Letter of Intent (LOI)
  • Conduct financial due diligence

Vet Target Companies


Once you’ve identified a target company, it’s essential to secure some basic information you need for initial vetting.  While it may be enticing to jump in full-speed and start to turn over every stone within the company, it can be incredibly frustrating and time-consuming if you don’t manage this part of your process in an efficient and effective way.

There are many high-level questions that you need to consider before proceeding further: 

  • Is the pricing fair and reasonable given the level of recent historical earnings?
  • Will real estate be a component of the purchase? 
  • How dependent is the company on the current owner?
  • How concentrated or diversified is the customer base?
  • Do you have the background and knowledge needed to run this company? 
  • What are the general risks and rewards of owning this company?
  • Are you aligned with the existing owner on his/her role, if any, post-transaction?
  • Do you believe that the seller is committed to selling the company?

Once you have covered these basic items, most prospective acquirers will then turn their attention to an initial valuation of the target company.

Perform a Valuation Assessment

Calculating the value of the target company requires financial statements, future projections, qualitative data, and estimations of future events, outcomes, risks, opportunities, etc. 

There are many M&A valuation methods, but here are briefly the most common ones:

  • Discounted cash flow (DCF): This analysis uses a discounted rate to find the current company value based on the expected returns and future cash flows. 
  • Earnings-Multiple Approach:  This method uses historical or projected earnings (or cash flow) and a simple multiplier to derive company value. 
  • Market-Based Approach: This approach involves comparing the target company with similar companies, which can include their competitors. 
  • Cost-Based Approach: The company’s value is the estimation of the total costs and money required to replicate this business. 
  • Asset-Based Approach: With the asset-based approach, you define the company’s value solely through the net asset value (NAV), assets minus liabilities, reflected on its balance sheet.

For most small companies, some combination of the DCF and Earnings-Multiple approaches will likely be the best solution(s).  However, company valuations can be highly complex and you may well benefit from engaging with an experienced advisor to support you in this process.

Submit a Letter of Intent

After addressing these and other initial questions, over a few days or a few weeks, and hopefully gaining some comfort with the basic profile of the company, it then may be time to formalize and communicate your interest in the target company — with a Letter of Intent. 

The Letter of Intent (LOI) is the proposal and official document you need to send to move forward with the acquisition process with the target company. While the LOI is non-binding, it does set initial expectations and is very important.  It serves as the initial step to present your offer and requesting additional information that you will need for further due diligence, research, and negotiations. The LOI also may include some exclusivity period during which the seller agrees not to market or consider offers from other parties.  

Conduct Financial Due Diligence

After the valuation assessment, you must conduct financial due diligence to ensure the seller’s representations are valid and reasonable.  This step could take 30-60 days after negotiating with the seller and can involve many experts, attorneys, tax advisors, M&A advisors, and more.    

Consider these details when performing financial due diligence:

  • Financial documents – Statements, tax returns, debt disclosures, etc.
  • Key performance indicators – Customer, revenue, and employee KPIs. 
  • Pending litigations – Current lawsuits or existing judgments. 
  • Human Resources – Organizational chart, job roles and responsibilities, payroll, benefits, disputes, and so on.  
  • Operations – Systems, tools, and processes. 

Financial due diligence is essential, and you should cross-reference the presented information and data to what you discovered or verified on your own.  If the information is largely accurate, you may feel ready to push to a close. However, if the information is inaccurate, you may need to reconsider acquiring this company from this seller or renegotiate the price.

Let us Help You Through the Acquisition Process

Sabre Financial Group can assist you through the entirety of the acquisition process:  finding targets, vetting them, performing valuation, conducting financial due diligence, structuring the deal, and securing quality financing.  Our next blog will highlight and discuss these last two items.

Our team has assisted businesses across dozens of industries and has the experience and knowledge to navigate complex issues. 

Please contact our team today to schedule a consultation to begin your acquisition strategy and process. 

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