The guiding principles of acquisition of an existing business are called synergies, value, and equilibrium. Synergies must occur between the two companies that are merging or between the buyer and the company being acquired. Ideally, the companies that are merging should have a similar or complementary product or service lines, and their marketing and sales methods should be in harmony.
There are three areas where synergies should occur:
- Marketing and sales (new products and services, new clients or new markets should create more revenues)
- Operations (there should be volume discounts or better ways and means to set up and deliver products and services or both)
- Finance and Administration (the merger or acquisition should improve cash flow and fuel additional business projects)
If there are no synergies, there should be no acquisition. Value, meanwhile, is the capacity to generate profits and cash flow. Profits and cash flow create value and support growth: Profits generate equity that increases value, and cash flow builds working capital and strengthens the day-to-day operations.
A business that cannot create value should not be acquired. Equilibrium is striking the right balance. About synergies, the acquisition should be feasible operationally and financially. In other words, a very small company should not acquire a very large company and a company that manufactures widgets should probably not acquire a company that manufactures clothing. Another kind of equilibrium is in the potential to create value: The investor should be able to add value to the company being acquired and vice versa.
Remember, an acquisition that is not in equilibrium with positive synergies and value should not be made.