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5 Questions To Ask Before Acquiring A Technology-Based Middle Market Company

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5 Questions To Ask Before Acquiring A Technology-Based Middle Market Company

All M&A transactions have a lot in common. The acquirer must perform rigorous due diligence to verify the history and quality of the target company’s earnings, the validity of its assets, the collectability of its Accounts Receivable, the extent of current or potential litigation.

Risks--such as customer concentration and threats from competitors—must be carefully considered.

But when a transaction involves a middle market company whose value consists largely of its technology and intellectual property (IP), one issue is especially important for due diligence. The acquirer or merger partner must question rigorously the value and relevance of the acquiree company’s technology going forward. My experience as CEO of several middle market companies that produce and sell technology-intensive products has taught me: ignore this step at your peril.

Consider what is at stake in many acquisitions. To satisfy their investors and drive a rising valuation, firms that own a portfolio of niche technology manufacturing companies must deliver top and bottom line growth every quarter. To meet this goal, the parent company or private equity sponsor needs to see its companies achieve consistent organic growth and margin improvement from operational efficiencies. Many such companies also pursue a strategy of strategic acquisitions: bolt on acquisitions and platforms for future roll ups. To justify and sustain the funding for this kind of aggressive growth strategy, their acquisitions must deliver consistently: in the short- and longer-term. 

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