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Investment Criteria

Definition - What does Investment Criteria mean?

Investment criteria are the defined set of parameters used by financial and strategic buyers to assess an acquisition target. Sophisticated buyers will usually have two sets of criteria:

  • The parameters that are disclosed publicly to intermediaries such as investment bankers, so they know what the buyer is looking for in order to source deals that fit; and
  • The parameters developed for internal review that allow a buyer to quickly determine if the acquisition should be pursued further.

The most common publicly disclosed investment criteria include the geography, size of the investment or company targeted, and industry. Some buyers also disclose criteria regarding the investment type which may include management buyouts (MBO), distressed opportunities, or succession situations.

Divestopedia explains Investment Criteria

Investment criteria are used by buyers to quickly assess acquisition opportunities. They make the process of sourcing and qualifying new opportunities more efficient. For example, private equity firms may look at 250 companies before closing one investment, so having clearly established investment criteria creates focus and quickly eliminates deals that do not fit the buyer and/or the seller.

The primary purpose of the criteria disclosed to the general public is to gather as much deal flow as possible. Once the details of the opportunity are gathered, the internal investment criteria will be applied to determine if an expression of interest (EOI) or letter of intent (LOI) should be issued.

Some common internal investment criteria include:
  • The strength of the management team;
  • the estimated IRR on the investment;
  • Customer diversification; and
  • Barriers to entry.

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