This is the final part of a checklist adapted from Michael Sheen’s book “The Investment Checklist,” which features a comprehensive checklist of questions to ask when evaluating a business and its stakeholders.
This final section touches a little on growth opportunities for the business and also critically evaluates if mergers and acquisitions (M&A) have done well for the company.
1. Is the management team growing the business steadily?
Many companies are focused on growth, but not many are able to ensure that this growth is steady and sustainable. Management that guns for fast and outsized growth usually ends up taking on significantly higher risks in order to achieve unrealistic targets. The business may also take on huge debt loads and flush large amounts of cash down the drain in order to achieve high growth rates.
Companies that grow too quickly eventually suffer from burnout, which is loosely defined as the inability of the business to manage the growth and ensure that all cylinders are firing at optimal rates. In the rush to grow, management may not always do sufficient due diligence on acquisitions, resulting in bloated purchases that cost too much and take too much time and effort to integrate. Investors should, instead, keep an eye out for companies that commit to steady and gradual growth at a pace that is sustainable and consistent. This ensures the company is using resources wisely and that capital is allocated efficiently and prudently.
2. How does management make M&A decisions?
It’s important to understand how management makes decisions regarding mergers and acquisitions. These include the criteria for M&A (including the financial and operating metrics that management deems important), the assessment of the price to be paid, the rationale for the purchase (i.e., how it integrates with the existing business or allows synergies to be achieved across the group), and how to monitor if the acquisition is performing well.
Investors should assess if management carried out proper due diligence and research before conducting the acquisition. Were suitable alternatives considered? How was the price determined, and what assumptions were used for the future of the business moving forward? All these help to build a well-rounded picture of how savvy management is when it comes to completing great M&A deals.
3. Have past acquisitions been successful?
Investors should take a critical look at management’s M&A track record to determine if past acquisitions have indeed added value to the overall business. Obviously, not all acquisitions will pan out well, even with the best management team, but it’s the ratio of hits versus misses that determines if management has what it takes to execute great M&A.
Companies with a proven track record of successful M&A are attractive to investors as M&A are traditionally difficult to pull off and may be fraught with uncertainties. That said, investors still need to evaluate all current M&A plans on a case-by-case basis and not let hubris lull management into a false sense of security.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice.