Each decision you make to commit resources—your money or your use of corporate or personal time—affects the future value of your business.
Minor decisions, such as replacing employees who have left the company or replacing equipment needing updating, are usually considered operational in nature, and unless the business is changing direction, not relevant to this test. But each commitment of resources of any substantial size for acquisition of new products, talent, even new companies, changes the value of your enterprise perhaps to a great degree.
Should I make an acquisition to increase value?
Let’s analyze the effect of a potential acquisition upon the value of your company. We assume that you intend to sell the enterprise at some point in the future. Let’s list some of the many reasons your company might find to make an acquisition. New products, new geographic territories, elimination of a competitor, increase in revenues, consolidation savings, new talent, new distribution channels, and more are good reasons for a start.
Odds that an acquisition will be a success
Given these possible goals in making a good acquisition, there is one overarching question that you should consider before making that decision to acquire a company. Know first that statistically, 80% of all acquisitions do not meet the intended objectives of the acquirer, making most all acquisitions risky. The question to study in your board meeting long before making any offer to purchase a candidate business is: “Would this acquisition add significantly to our enterprise value and attractiveness in an eventual sale?”
The alternative uses of your time and money
If the answer is “no” to the question above, and there are other opportunities for the use of cash that would add value, it would be wise to allocate resources to those opportunities.
Many companies find acquisitions to be a decision of “make or buy.” If the price of an acquisition is so high as to make the risk of creating the product or service yourself more attractive, that alternative must be discussed with your board. Remember to consider the cost of lost time if starting from scratch, and of patent or other branding considerations that would challenge a “make” decision.
After all, we are in business usually for the ultimate return we will someday receive from our investment. If we are skillful in growing our business, the return from its sale will greatly exceed the total amount you will have earned from operations during the period of growth.