When a company wants to grow through acquisition, the process involves more than just finding a business to buy. It requires a systematic approach to evaluating potential targets, ensuring the transaction creates long-term value. Every step is critical, from defining a target profile to navigating due diligence and negotiations.
Walden M&A President John Phillips and Principal AJ Alexander shared their insights on the key factors buyers should consider when evaluating a business for acquisition. Their perspectives underscore the importance of a structured process, thorough analysis, and a balanced focus on both financial and non-financial aspects of a deal.
Defining the Target Profile
For a buyer, the first step is to define what they are looking for. A strong target profile goes beyond simple financial return and aligns with the buyer’s overarching strategic goals.
“A successful buy-side program is going to be very narrowly defined because there are so many different businesses out there,” says Phillips. “If you cast a wide net, you’re not going to be efficient in your search, and you’ll end up wasting a lot of time and resources looking at businesses that don’t fit what you’re trying to achieve.”
According to Phillips, defining a target profile helps a buyer identify exactly what type of company will help them reach their specific goals. He explains it is important to think about the long-term, about where the business is headed in the next three to five years. Is the goal to add new products, enter a new market, or gain new capabilities?
“I always ask a client, ‘What does the company look like after you’ve acquired the business? What are the synergies you expect to achieve?'” says Alexander. “The best acquisitions are not just about adding revenue; they’re about making the combined entity stronger than the sum of its parts. A buyer should be looking for a target company’s adjacency to core markets and its ability to bolster their existing capabilities.”
Alexander explains synergies—operational efficiencies unlocked after the acquisition—should be achievable quickly and safely post-close. He also says to consider the non-financial aspects of the transaction, such as the culture and the leadership team. He explains both should be a part of the ideal target profile.
The Initial Evaluation: Separating the Signal from the Noise
Once a potential target is identified, the initial evaluation serves as a “gut check” to see if a deeper look is warranted.
“The business should be a leader within its market, whether defined geographically or by industry,” says Phillips. “And it needs to have a history of profitability. A buyer should be able to see a clear path to continued success.”
Alexander points out several red flags which can signal a poor investment. “I look for inconsistent financials, off-balance sheet obligations, and customer concentration,” he says. “If 70% of a company’s revenue comes from a single customer, it’s a major risk.” Alexander also looks at indicators like employee turnover, which could signal toxicity in a company’s culture. Identifying these issues early can save a buyer valuable time and resources.
Navigating the Valuation Maze
Valuation is a complex part of the process, but the primary emphasis in lower-middle-market transactions is always on a company’s historic cash flow.
“I use a discounted cash flow (DCF) model, which projects future cash flows, and I cross-reference it with industry comparables for market context,” says Alexander. “The challenge for private companies is finding comparable transaction data can be challenging because many deals are kept confidential. This is where Walden M&A’s access to in-depth databases and research tools provides significant value for our clients.”
Phillips agrees while there are many valuation models, the most common is one based on historical cash flow. “Historically, the valuation is going to be heavily weighted toward historical cash flow,” he says. “Still, in a booming market, such as the one for AI technology, a lot more emphasis may be placed on future income and cash flows. This is why it’s important to have an M&A advisor who understands the market and can provide an accurate valuation.”
Intangible assets, such as brand reputation and intellectual property (IP), can also be a significant part of the valuation. These assets can be assessed based on the cost to recreate them or their potential to immediately improve the business.
The Due Diligence Imperative
Due diligence is the most critical phase for a buyer. Beyond financial statements, a buyer should scrutinize a business’s processes, technology, and management team. The goal is to determine the feasibility and cost of integrating the new business post-transaction.
“The due diligence process is designed to uncover information which can impact a buyer’s comfort level with the price and structure of the deal,” says Alexander. “You’re assessing the team you are acquiring in conjunction with their current market strategy and systems. Being proactive with integration planning can help you anticipate challenges before the deal is finalized and ensure you capture the value you expect.”
Phillips notes the most common challenge faced is a selling company providing timely and accurate information. “A prepared seller with organized books and processes is a key factor in a successful transaction,” he says.
The Art of Negotiation
Negotiation is a delicate balancing act between the gaps in valuation and the risks identified during due diligence. Common challenges include disagreements over working capital and the emotional attachment a seller may have to their business and legacy. A skilled M&A advisor can help a buyer navigate these issues by maintaining a disciplined, transparent, and structured process.
In situations where a seller is unrepresented by an M&A firm, Phillips says Walden M&A will advise their client to have the seller consult with their own financial and legal teams. “While our primary responsibility is to the buyer, we will help create a straightforward process and provide recommendations for third-party advisors to the seller,” says Phillips.
Beyond the Spreadsheet: Evaluating People and Culture
Numbers are important, but people and culture are just as critical for a successful acquisition. A buyer needs to assess the leadership team’s capabilities, the culture of the company, and the willingness of employees to adapt to a new system.
“You should look for a culture where employees are empowered to make decisions and are incentivized for their performance,” says Alexander. “I also tell clients to ask questions about how the company deals with clients and how its core values align with their own. A key observation is how well a leadership team communicates and if they have a clear roadmap for growth.”
The Walden M&A Advantage
Having a buy-side M&A advisor like Walden M&A provides a competitive advantage because of the structured process and deep expertise they bring to the table. Walden M&A helps buyers define their ideal target, develop target lists, and approach potential sellers in a relationship-focused manner.
“We focus on high-priority communication with the client throughout the entire process,” says Phillips. Alexander echoed this sentiment, calling the process a “system” rather than a straight line, where assumptions are tested and trade-offs are made with a client-focused approach. The Walden M&A team also brings firsthand experience as former business owners and operators, which provides them with a unique understanding of the buy-side process and enables them to deliver significant value to their clients.
If you are looking to acquire a business, contact Walden M&A today to begin a conversation about your strategic objectives and how our buy-side process can help you find and acquire a business which aligns with your vision.