Promontory Perspective – The “What” and the Role of Setting Acquisition Criteria

 This is part 2 of a five-part series discussing the critical steps a privately-held company needs to take to succeed with a strategic M&A initiative. For additional articles and videos, please visit https://promstrategy.com/psg-news/ and https://www.youtube.com/@riegginsights)

Once a company knows why it wants to pursue an acquisition, the next question is what the right target actually looks like. That sounds simple until several opportunities are on the table and each offers something different. One may have strong margins but operate outside the buyer’s preferred market. Another may fit strategically but require more operational work than expected.

Clear business acquisition criteria give privately held and family-owned companies a way to sort through those tradeoffs before a specific deal starts driving the conversation. The goal is not to build a checklist so narrow that no company can qualify. It is to define the characteristics that matter most so leadership can spend its time on opportunities that fit the company’s goals, financial capacity, and ability to manage the business after closing.

Step 2: What Should Business Acquisition Criteria Include?

Before a company can decide what kind of business it should acquire, ownership needs to understand why it wants to pursue an acquisition in the first place. As we covered in Step 1 of the series, establishing an acquisition strategy connects the search to shareholder objectives, financial capacity, and the company’s broader direction.

Once that purpose is settled, the company can move to the “what.” What kind of business would actually advance the strategy?

The answer should be specific enough to guide acquisition target screening but flexible enough to account for opportunities that may not look exactly as expected. A privately held company entering a new market, for example, will likely evaluate targets differently from a company trying to add a manufacturing capability or reduce customer concentration.

The criteria should reflect those differences. Industry, geography, revenue, profitability, management depth, culture, intellectual property, and integration needs may all matter, but they will not carry the same weight in every transaction.

Start With Strategic and Financial Fit

A potential target should first make sense within the direction already established by the shareholders and leadership. This is the basic question behind strategic fit in acquisitions.

Does the company strengthen something the buyer already does well? Does it add a capability that would be difficult to build internally? Could it open a useful market, broaden the customer base, or support a diversification goal? A target can be a good business on its own and still be the wrong business for a particular buyer.

The financial side deserves the same discipline. Useful financial criteria for acquisitions may include revenue, gross margin, EBITDA dollars and percentage, balance sheet strength, working capital needs, capital expenditures, and cash flow.

Those numbers should be considered together rather than individually. A business with attractive revenue growth may require substantial equipment spending. Strong EBITDA may look different once you understand customer concentration or working capital needs. Financial performance helps narrow the field, but the quality and durability of that performance matter just as much as the headline numbers.

The company should also determine what size transaction it can realistically absorb. That decision needs to reflect not only purchase price, but also financing, post-closing investment, and the deal’s effect on the existing business.

Look Beyond the Financial Statements

Some of the most important acquisition questions are difficult to see on an income statement. Industry and market conditions are one example. Leadership should assess growth prospects, competitive pressure, market share, customer relationships, and the target’s reputation within its industry. A strong company operating in a declining or rapidly changing market may require a very different investment case than one positioned in a growing segment.

Operational factors also deserve an early look. The buyer should consider the scalability of the operation, the quality and depth of management, supply chain strength, facilities, systems, and the infrastructure needed to support future growth. These factors help determine whether the target can continue performing as expected once ownership changes.

Geography may matter more for some strategies than others. A company looking to enter a new region should consider where operations are located, how well that location supports the larger strategy, access to customers and suppliers, and the economic or political conditions affecting the market.

Technology and intellectual property can add another layer of value. Patents, trademarks, proprietary technology, and research and development capabilities may be central to the investment thesis in some industries. For other buyers, those factors may carry little weight. Good M&A target criteria distinguish between what would be useful and what is genuinely important to the reason for pursuing the acquisition.

Culture, Risk, and Integration Can Change the Answer

A target may fit the strategy and meet the financial requirements but still create problems if the two organizations are difficult to bring together.

That is why cultural fit in M&A should be considered before the final stages of a deal. Ownership and leadership styles, decision-making habits, employee expectations, communication, and company values can all affect how smoothly the businesses work together.

Culture does not have to be identical. In some cases, different strengths are part of what makes an acquisition attractive. The question is whether those differences can realistically coexist or whether they are likely to create friction that affects employees, customers, or performance.

Risk assessment belongs in the conversation as well. Legal and regulatory compliance, pending litigation, environmental matters, customer or supplier dependence, and other liabilities can materially change an opportunity’s value. Some risks can be addressed through pricing, deal structure, insurance, or other protections. Others may be serious enough to make the target unsuitable.

Integration potential ties many of these questions together. Leadership should consider how difficult it would be to combine operations, systems, reporting structures, and management responsibilities. The buyer should also think about whether integration could disrupt the existing company or the target during the transition.

A realistic view of post-acquisition integration can prevent a deal from looking better on paper than it will perform in practice.

Decide What Matters Most Before a Target Appears

Not every criterion should carry equal weight. One of the more useful parts of the process is deciding which characteristics are requirements, which are preferences, and which would cause the company to walk away.

A buyer pursuing a new geographic market might treat location as non-negotiable but remain flexible on revenue size. A company looking for specialized technology may care more about intellectual property and technical talent than current profitability. Another buyer may place management depth near the top of the list because it lacks the internal resources to replace the target’s leadership after closing.

This kind of prioritization makes how to evaluate acquisition targets a much more practical exercise. Instead of asking whether a company is generally attractive, leadership can ask whether it satisfies the reasons the acquisition program exists in the first place.

The criteria can also evolve. As a company studies a market and speaks with potential targets, it may learn that some assumptions were too narrow or that another factor deserves more attention. Updating the criteria based on new information differs from changing them simply to justify a deal leadership already wants to complete.

Promontory Strategy Group’s Riegg Insights video on establishing acquisition criteria provides additional perspective from Chris Riegg on this second step in a disciplined M&A process.

Better Business Acquisition Criteria Lead to a Better Search

Well-defined business acquisition criteria give a privately held or family-owned company a clearer picture of what it is looking for before management begins investing heavily in a particular opportunity. Strategic fit, financial performance, market conditions, operations, culture, risk, geography, innovation, and integration potential all help determine whether a target deserves a closer look.

The value of the exercise is not finding a company that checks every possible box. It is knowing which boxes matter most and why. With that foundation in place, ownership can move into the next stage of the acquisition process with a more focused search and a better basis for comparing opportunities. Contact Promontory Strategy Group to discuss how your company can develop acquisition target criteria that reflect its strategic and financial objectives.