This is the final part of a checklist adapted from Michael Sheen’s book “The Investment Checklist”.
His book features a comprehensive checklist of questions to ask when evaluating a business and its stakeholders.
This 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.
You can check out the first 12 parts by clicking on the links below.
Part 1 – please click HERE.
Part 2 – please click HERE.
Part 3 – please click HERE.
Part 4 – please click HERE.
Part 5 – please click HERE.
Part 6 – please click HERE.
Part 7 – please click HERE.
Part 8 – please click HERE.
Part 9 – please click HERE.
Part 10 – please click HERE.
Part 11 – please click HERE.
Part 12 – please click HERE.
57. Is the management team growing the business too quickly or at a steady pace?
Many companies are focused on growth but it ends up being a race to “grow at all costs”.
Not many can ensure that its growth is sustainable.
Management that guns for fast growth usually ends up taking on significantly higher risks to achieve unrealistic targets.
The business may also take on huge debt loads and flush large amounts of cash down the drain to achieve these high growth rates.
Companies that grow too quickly eventually suffer from “burnout”.
Burnout is defined as the inability of the business to manage its rapid growth.
In the rush to grow, management may not always perform 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 sustainable pace.
By growing slower, these companies ensure that resources are utilised wisely and that capital is allocated efficiently and prudently.
58. How does management make M&A decisions?
It’s important to understand how management makes decisions relating to M&A.
Investors should understand the criteria for conducting M&A (including the financial and operating metrics that management deems important) and how the company assesses the price to be paid.
Management should also make clear its rationale for making the purchase (e.g. 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.
Was proper due diligence and research carried out before the purchase was announced?
Were suitable alternatives considered before management pulled the trigger?
How was the price paid determined and what assumptions were used for the future of the business moving forward?
All these questions help to build a more comprehensive picture of how savvy management is or isn’t concerning M&A deals.
59. Have past acquisitions been successful?
Investors need to take a critical look at management’s M&A track record to determine if past acquisitions have indeed added value to the overall business.
Not all acquisitions will pan out well even with the best of intentions and calculations.
But what you can review is the ratio of hits versus misses that determines if management has got what it takes to execute effective M&As.
Companies with a proven track record of successful M&A are attractive as acquisitions are generally 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 allow hubris to lull management into a false sense of security.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
