In the mid 1990s, healthcare entrepreneur Greg Serrao saw an opportunity in the fragmented dental market. As more and more dentists banded together to increase profitability and share administrative costs, group practices were becoming the norm. Even these small groups were not as cost-efficient as they might have been, since they were not big enough to invest in cutting-edge administrative and business management tools.

Serrao founded American Dental Partners, Inc. in 1995 and used a new approach—an affiliation model—and he sought financing to make his vision a reality. The following year, Serrao chose to work with Summit Partners, which invested $14 million in the company and arranged $75 million in bank financing. American Dental Partners used the capital to acquire select assets from each practice in exchange for taking on all administrative and business aspects. The company went public in 1998 (NASDAQ: ADPI) and today is the dominant player in the industry, with more than 25 dental groups serving 180 dental facilities in 18 states across the United States.

Like many companies in fragmented, moderate growth industries, American Dental Partners chose to grow through acquisition. That strategy became more difficult during the credit crisis of 2007 and 2008, as M&A activity in the middle-market sector declined precipitously. Since the beginning of 2009, however, deal transaction activity has increased significantly. Over the course of 2009, middle-market deal volume increased by 26%, while deal value rose by 73.7%.¹  That strength has continued into 2010, with 1,700 middle-market deals valued at an estimated $30 billion during the fourth quarter.² As 2010 continues, we again see opportunities for strong, industry-leading firms to grow through acquisition. 

At Summit Partners, we have found that companies can significantly increase their chances of success by carefully considering a number of factors.  

What are the critical elements in a successful acquisition strategy?

First, you must define the goal of your acquisition strategy. Do you want to acquire new customers? Drive down costs? Increase the number of products you deliver to customers? The answers to these questions will determine the companies you buy, the prices you pay and how you integrate each acquisition into your core business. If you haven’t defined your goals, you can’t begin to execute an effective acquisition campaign.

Second, never bet your entire company on an acquisition. As a rule of thumb, assume that one of every three acquisitions will be a home run, one will perform adequately, and one will strike out. Make sure that you never risk more than you can afford so that you don’t lose it all on one unlucky acquisition.

Third, only buy sound companies—especially if you don’t have solid experience in turnarounds. Problem companies are almost always harder and more expensive to fix than you might anticipate.

And fourth, implement your acquisition strategy just as you would any important operating strategy. Staff it with experienced people—including a development officer—and fund it with an adequate budget. These are the basics of developing a good acquisition strategy.

Now let’s look at what can go wrong if you’re not vigilant:

• Misunderstanding the customer: Will your customers really buy the products or services you assume are complementary to your own? If you misjudge their needs, you could end up with two completely unintegrated customer bases and product lines—an expensive and untenable proposition.

• Overestimating cost savings: Many companies think they can squeeze significant savings out of an acquired company by moving field functions like sales, administration and service into the centralized headquarters. However, your acquired company’s competitive advantage may well be a function of these field functions. Consolidate carefully in a way that provides continuity for your customers.

• Underestimating customer fallout: Any time you acquire another company, you are going to lose some of that company’s customers. Don’t assume that sales or revenues will be the same as they were before the acquisition.

• Mismatching corporate cultures: Examine the way that the acquisition target relates to its customers, suppliers and employers. Make sure that its corporate culture is complementary to yours.

Entrepreneurs can increase the probability of their success by enlisting the advice of board members, investors, and other advisors experienced in acquisition strategies. These experts can help you structure and capitalize your company, refine your strategy, identify target companies, negotiate with management and perform due diligence. Most important, they can help you achieve growth through acquisition—and ensure that your core business continues to drive revenue.

¹ Thomson Financial, as cited in Deloitte & Touche’s Middle Market M&A News, March 2010.
² Thomson Financial, as cited in Deloitte & Touche’s Middle Market M&A News, May 2010. 

A version of this article originally appeared on Inc.com.