Uncommon Sense: Acquisitions--Avoiding the Quagmire
That leaves acquisition, which is the alternative many companies are pursuing today. Forget mergers; those only exist in daydreams and Fortune magazine. Acquisition is not a bad way to go, but there are some things you should keep in mind beyond the normal due diligence that focuses on accounting records.
It would be very unusual for rational owners to sell if they would benefit more by not selling. That means you will pay a premium for the business, regardless of what the due diligence says. Realistically, the premium is directly proportional to the future prospects that the present owners perceive--and can convince you really exist--for the business. Factor that premium into your acquisition decision; your return on investment is going to be less than what the firm being acquired has produced historically. If the deal seems too good to be true, it probably is!