What Business Leaders Forget When Making Acquisition Decisions

If you have had any exposure to or involvement in investment and acquisition decisions then you'll know that behind every such decision is a financial valuation model. For the most part, these models tend to take into account the financial performance of a company, leveraging metrics like EBITDA, revenue, assets, and liabilities. All of which are hard tangible metrics. A lot of the times some "less tangible" items get taken into account such as the value of a brand. Which I would argue is still a fairly tangible metric because at the end of the day it does sit on the balance sheet in the form of an asset.

Most decision-makers take comfort in the fact that the use of such a model allows them to feel like they've done their due diligence before making a purchase or investment decision. However, in this article, I would like to address a factor that is rarely taken into account when making such critical business decisions. A factor that I believe most business leaders take for granted. A factor that can often make or break the success of an acquisition (outside of competence of course).

Relevance.

Financial performance aside, what is the one factor that almost always drives acquisition decisions especially amongst larger companies? It's relevance. Typically, larger companies that do not have the agility or the ability to innovate, buy market relevance by acquiring smaller companies that are already disrupting a particular category.

So what does relevance really mean in a marketplace? And who decides on whether a target is considered relevant?

Unlike financial valuation models where you could use any one of over a dozen different frameworks to evaluate the financial performance of a company, there are no toolsets and frameworks available for senior business leaders to evaluate the relevance of an acquisition target. Because relevance is nothing but a study of consumer culture. It tells us whether or not the shared values and beliefs exhibited by a target company attracts consumers at the bleeding edge of culture in its category. Understanding relevance requires you to truly understand emerging trends in your category. Trends that aren't yet relevant but will be in the next 24-month cycle.

Let me provide some personal context here. I run a year old disruptive research company called MotivIndex that works mostly with innovation teams of global Fortune 500 companies. MotivIndex helps its clients identify emerging consumer trends so that they can make appropriate business decisions concerning their products and services. About four months ago, we began getting requests from clients who were looking to improve their acquisition decision-making process. Each one of them wanted help determining whether the company they were looking to buy was going to make them more or less relevant in their category over a 12 to 24-month cycle. As we began working with such clients and creating a framework and model to value relevance, we realized that this was a gaping hole in the existing valuation process that needed some desperate attention.

And so I wanted to use this article to introduce the concept of relevance and also provide a set of questions that every senior business leader must be asking herself before making any acquisition or investment decisions.

  • Where are trends in my category headed over the next 24 months?
  • How are these trends going to affect my existing business?
  • How will these trends impact the business I'm looking to buy?
  • What are the shared set of values and unspoken motivations that define the most influential consumer in my marketplace? Does this consumer currently buy from the company I'm looking to acquire? How will this consumer react to the news of the acquisition?
  • Will this acquisition put my company in a leadership position in the market, or continue to position me as a follower?

As I mentioned before, relevance is really a study of consumer culture. And there are certainly a lot of companies out there that study consumer culture through the lens of understanding the shared beliefs, values and motivations consumers in your category hold. We at MotivIndex have our own perspective on these matters. But at the end of the day, the point I really want to get across here and leave you with is that no acquisition can be considered truly sound until you've valued the relevance of your target.