The main rationale behind one company purchasing another is to create value for the shareholders over and above the combined value of the two companies. Two companies together are worth more than two separate companies.

A strong company buys another one to create a single entity that is more cost-efficient and competitive, and which will hopefully gain a greater share of the market. This is often the reason why companies approached for purchase agree to the sale, as they know they won’t survive on their own.

Knowing the rationale behind a deal is usually much easier than making the deal itself. How do you recognize the right opportunities? The most effective way to identify a potential company for purchase is through engaging the services of a professional business advisor from a mergers and acquisitions company. There are many merger and acquisition companies out there. Choose one with extensive experience in handling deals similar in size to both your and the target business.

What To Look For
It’s not always easy to know if a deal is worthwhile or not, and the burden of proof usually falls on the acquiring company. Merger and acquisition companies will compile a shortlist of suitable businesses, and will help you identify certain characteristics that might indicate the business is ready to approach. Indications of readiness are if the target business:

* has poor management, or has managers who want to leave or retire.
* has complementary products or services which, when combined with yours, will provide a better offering to customers
* is undervalued
* does not use its assets to maximum effect
* would benefit from relocation

Boost Your Chance of Success
Even with the above in mind, it can be hard for investors to know when a deal is worthwhile. Your business advisor can increase your chances of success by looking at two key areas:
* Price-Earnings Ratio – looking at this ratio for all the stocks within the same industry group gives you a good idea of what the target company’s price-earnings ratio should be.
* Enterprise-Value-To-Sales Ratio – compares the enterprise value of a company to the company’s sales, giving investors an idea of how much it costs to buy the company’s sales.

Sunbelt Business Advisors has helped numerous companies and buyers improve their acquisition strategies to find the best deal for their objectives. Visit us at www.sunbelt-business-advisors.com to see what we can do for you.