Each decision you make to commit resources affects the future value of the business to some degree. Minor decisions, such as replacing employees who have left the company or equipment needing updating, are usually considered operational in nature, and unless the business is changing direction, not relevant to this analysis. 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.
Let’s analyze the effect of a potential acquisition upon the value of your company. We must assume that you intend to sell the enterprise at some point in the future. There are many reasons a company finds 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 considering an acquisition.
[Email readers, continue here…] 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?”
If the answer is “no”, and there are other opportunities for the use of cash that would add value, it would be wise to allocate resources to those opportunities. After all, we are in business usually for the ultimate return we will someday receive from our investment.
