Acquisition Strategy: Market Choice

Before you look for a company to buy, you need to define the market where you will search your target.

Why? The fact is that in almost every business situation, growth follows demand.  The reason you pick your market before you choose your prospects is to ensure there is a healthy, stable demand for your acquisition partner’s products or services.  Without that certainty, you should beware of the most tempting buying opportunity. A sweet-smelling prospect in a no-growth market may well turn out to be a lemon.

To make a good choice of market, as for any important decision, you need clearly defined criteria. Here are some guidelines for building effective market selection criteria, based on years of practice with companies in a variety of industries:

  • Focus on strategic aspects early — For example, if your one reason for acquiring is to bring a current competency to a new market, you will want to make sure that whatever new market you acquire into is growing.  In this case, growth rate will be one of your earliest criteria.
  • Be realistic about the availability of information — You may not be able to get growth rates for the last twenty years or sales figures for the previous year immediately.  As you move along in the process, you will gather increasing detail about the market (and individual prospects), but in the beginning, you can make do with relatively broad information.
  • Limit to no more than six criteria — If you have more than six criteria, you can lose focus on the most meaningful strategic aspects.  However, each individual criterion may have multiple metrics.  For example, the criterion “customers” may include the size of the customer base, switching costs and geographic distribution.
  • Make it measurable — When conducting your research, establishing metrics will give more power and focus to your decision-making process.  For example, it is more useful to say that you seek a market with a growth rate of at least 8% rather than just a market that has “strong growth”.

Choose the market before the prospect and establish clear criteria for your market choice: seems like common sense? You’d be surprised how frequently these critical steps are skipped by over-eager M&A practitioners.