The Difference Between a Good Business and a Good Acquisition
One thing we’ve been thinking about more lately is that a good business and a good acquisition aren’t always the same thing.
You can find a business with strong margins, loyal customers, an experienced team, and a long operating history and still have a difficult acquisition on your hands.
The question becomes what you’re actually paying for and what has to happen after closing to generate an attractive return. Is the business still compelling if organic growth stays modest? Is there enough room to improve the operation? Are there logical ways to expand the customer base, add new services, or pursue acquisitions?
We’ve found that it’s easy to get excited about the quality of a business and forget to ask whether the entry price, growth assumptions, and downside case make sense together.
A great company at the wrong price can be a poor investment. A solid company with the right price and a credible path to improvement can sometimes be much more interesting.
Curious how others in the search community think about this. What usually makes the difference for you between a “good business” and a “good acquisition”?
The distinction between a good business and a good acquisition often boils down to the interplay of price, growth potential, and operational improvement opportunities. Here's how the most helpful WSO content frames this:
Good Business vs. Good Investment: A business with strong margins, loyal customers, and a long operating history might not necessarily translate into a good acquisition. The key lies in evaluating what you're paying for and what needs to happen post-closing to achieve an attractive return. For example:
Valuation and Entry Price: A great company at the wrong price can lead to a poor investment. Conversely, a solid company acquired at the right price, with a credible path to improvement, can often yield better returns. This highlights the importance of aligning entry price with realistic growth assumptions and downside scenarios.
Post-Acquisition Strategy: The ability to create value post-acquisition is critical. This could involve:
Risk and Downside Protection: A good acquisition often includes a clear understanding of the downside case. This means assessing whether the business can sustain itself even in less favorable conditions and whether the acquisition price provides a margin of safety.
Ultimately, the difference lies in the ability to balance the intrinsic quality of the business with the financial and strategic considerations of the acquisition. A good acquisition is not just about buying a great business but about ensuring the price, growth potential, and operational strategy align to deliver strong returns.
Sources: What separates the good from the great in Private Equity?, Q&A: Analyst --> Associate at a VC / Growth Equity Firm, Private Equity: How to Analyze a CIM Effectively?, PE interview question - If you can only know 3 things for an investment analysis?
Price. It's always price.
Price and multiples are larger drivers of returns. Sometimes succesful exits are just cases of multiples going up a lot, not operational success. Sometimes even when you meet all the operational goals you had, you will still exit flat or at a loss because of multiple compression. Anyone that bought software in 2020/2021 knows this all too well, though some companies that were being bought are also bad businesses.
Longest post ever to say overpaying is bad
I mean as a consultant, this concept was obvious to me from my first projects inside PE assets. There are amazing companies that would be sweet to own if you would be the family heir.
Stable margins, low growth, but significant cash that could be paid out as dividends every year. Think of 100mn EBITDA, that trickles down 40-50 FCF to the owners every goddamm year. Absolutely amazing. Owners are happy, workers are happy, broader region in which the company is located and stakeholders are happy for local sponsorship of e.g., sports venues, social activities, schools, public infra.
Now come the PE guys and because they overpaid, continuing as is is not enough to give them a proper return.
They fire people, go after obscure cost saving targets (ie, negotiating and squeezing long standing suppliers all the way down to indirects such as toilet paper to save a couple of bucks) and close down locations. People within the org feel more and more dissatisfied and are scared about their prospects.
I think as a banker you are far too removed from that, but as a consultant you are essentially on the frontlines working with the folks of these companies day by day.
The PE owners are breathing down their neck and most of the time a lot of the sponsors are absolutely clueless. They only thing they do is set up ridiculous business plans that are never hit but 9/10 times I have been severely unimpressed by most senior people of large buyout funds.
I agree that the acquisition price can make a big difference. A business can have strong fundamentals, but if the valuation is too high, it may be difficult to generate a good return.
For me, the key factors would be sustainable cash flow, realistic growth potential, customer retention, and opportunities to improve the business after acquisition. I would also look closely at how dependent the company is on the current owner or a small number of customers.
So, I think a good acquisition is not only about buying a good business. It is about finding the right combination of business quality, purchase price, risk, and future opportunities for growth.
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