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Berkonomics

Looking to be acquired? Think the 10/40 or 20/20 rules.

Public companies looking to acquire your growing enterprise usually have a few financial measures that help them weed out those candidates that will be too expensive in terms of effort or of too little financial attractiveness.

The first rule: 10/40:

One of my company CEOs recently described his rule for acquisition success, and it resonated with me as a great goal for planning during acquisition exercises.  This CEO states that he has made it work twice when acquiring companies, and that is enough for him to make it his rule for all future acquisitions.

If the target company can show a ten percent EBITDA (earnings before interest, tax, depreciation and amortization), then the acquisition team should be able to create a way to make the resulting acquisition yield forty percent EBITDA after re–engineering the combined entity.

That’s quite a goal to achieve.  But there are obvious and not–so obvious ways to make it happen, even if over time.

The second rule:  The 20/20 rule

If you are experiencing 20% annual growth and 20% net profit before depreciation and tax, or any combination that adds to 40% (such as 10% profit and 30% growth), you are a prime target.

How to “sell” expense reduction and growth prospects

[Email readers, continue here…]   Here are some of the checklist items your acquirer will consider.  Dual layers of senior management remain only during the transition period and transfer of institutional knowledge from acquired to acquirer.  The best performers from the acquired become candidates to outrank or replace their counterparts, showing that a business combination is not all one–sided.

Accounting and HR operations are combined as quickly as possible, as are customer service call centers, retaining specific product skills on the front line from the acquired company.  R&D efforts may remain separate for a period or forever, but R&D management is consolidated as soon as possible to avoid territorial disputes and retention of inefficient development processes.

Sales organizations may or may not be combined, but senior sales management is consolidated so that commissioning, territorial management and product management functions all harmonize.

Facilities may become redundant or oversized after these efforts, allowing for consolidation of facilities as well.

If we follow the reasoning of our CEO who proposed the rule, we can drop an additional 30% of the net revenues (after cost of sales) from the acquired company to the bottom line.  Not a bad goal, and certainly not a bad result.

  • Chris Brecher

    I agree with all of these cost take-outs post acquisition. A prospective buyer who was a VC used different metrics than your 20/20 rule. Their combined target was 70 instead of 40 (35/35 for example). My guess is a 20/20 buyer would most likely be a strategic.

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