How To Prepare For An Aquisition

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Considering an M&A initiative? Don't forget due diligence when profiling targets, assessing potential synergies and calculating the ultimate business gain from a particular merger or acquisition.

The following are several benchmarking metrics G2R/Dataquest Inc., Mountain View, Calif., has identified, which can help you during the M&A due diligence phase.

Gross Margin. Prospective acquisitions must demonstrate a subsequent and sustainable financial impact for the acquiring parent company. Acquisition targets should have a proven independent ability to control delivery costs while maintaining exceptional productivity levels. Acquiring firms need to evaluate whether the candidate:

1) deploys expensive delivery resources and

2) prices effectively.

Net Income Before Tax (NIBT). As the health of a firm is measured by NIBT, this metric helps the buyer identify the financial risks of a candidate's ability to attract capital. Having an acceptable NIBT must be a minimum criterion for the buyer unless there are valid reasons such as significant services that will ensure significant long-term payoffs. The question to be answered is what expectations of improvement are being sought and whether the acquiring firm will benefit more from superior NIBT (including nonoperating expenses) vs. pure operating margins.

Revenue Per Head (RPH). The target range for RPH should be greater than $200,000. A robust RPH ratio indicates efficient use of both delivery, labor and overhead costs, and thus could garner a price premium.

Labor Multiplier. This exemplifies the average factor by which billable personnel can be charged over their fully loaded labor cost. Does the company excel at pricing its skillsets? The recommended threshold for labor multiplier is greater than 250 percent.

Brand Strength. Because solid brand strength ultimately contributes to lower sales costs and higher hit ratios, VARs and SIs can immediately capitalize on leveraging an acquired company's brand equity. Know whether you seek to improve your brand strength through the purchase or to augment your own, already strong, market identity.

Benchmarking metric performance often validates management's intuitive decisions with quantifiable data about the prospect's strengths and weaknesses. A smart acquirer will use metrics to identify areas where they can make improvements.