Regardless of a company’s industry, age, physical location, or size, buyers will closely analyze many factors when evaluating potential acquisitions. From the sustainability of your business model to the integrity of your financial statements, sophisticated acquirers will leave no stone unturned. We have summarized buyers’ key areas of focus.
- Sustainability of Business Model – Does your business provide a product or service to a viable customer base? Is the cost of producing your product or delivering your service less than what the market is willing to pay for same? Does your business generate recurring revenue, contractual or subscription-based? Or, is your business dependent on project/one-time revenue?
- Growth Rate & Fragmentation of Industry – Buyers seek companies that have continuously generated profitable growth; the higher the growth rate, the higher purchase price a business may demand. And, companies growing faster than the industry they operate in may demand an even higher purchase price. Additionally, companies operating in highly fragmented industries present growth opportunities for buyers looking to consolidate a particular industry (i.e. home, business, or professional services).
- Quality of Customer Base – Diversification of customer base and high customer retention are also extremely important. Depending on a company’s industry, if more than 15%+/- of a company’s overall revenues are generated from a single customer, buyers may view this as posing a significant customer concentration risk. Conversely, if a business has consistently retained its customer base, year over year, this high customer retention rate affirms brand strength and potential sustainability.
- Differentiation from Competition – Is your product or service unique? Proprietary? Is your product or service supported by intellectual property? Do significant barriers of entry exist? Are you the high-priced or low-priced provider in your industry? More richly priced, highly differentiated product/service companies can be very attractive to the right buyer. The opposite, commodity or undifferentiated providers that compete only on price, are generally less valuable in the mergers and acquisitions market.
- Quality & Integrity of the Company’s Data – How accurate are your financials? Are business systems and processes well documented? Do you have executed, legal contracts with major suppliers and customers? Are employment agreements, documenting commitments and expectations, in place? Financial reports with integrity and oversight from an outside accounting firm, contracts with a balance of potency and flexibility (i.e. assignability ease), and enforced employment agreements (including non-compete and non-solicitation language) provide buyers with confidence as to the sustainability of the business post transaction.
- Scalability of Business – Does your business have operating leverage for growth? Will greater topline revenue equate to increased profit margins? Aside from expansion of top line revenue, a business is considered scalable when existing overhead costs can support a larger business with little to no increase in expense. Ultimately, businesses with operating leverage are highly valued; since most businesses are valued at some multiple of cash flow or profit, operating leverage means the value of the business can grow faster than sales growth!
- Depth & Strength of Management Team – Businesses with experienced management teams in place that are not dependent on owner involvement for expansion and day to day decision making are valued much higher than those where the success and continuation of the business is contingent upon owner involvement. When a buyer needs to add key positions to account for lack of leadership, experience, or bandwidth for growth, a buyer may value the business at a lesser overall valuation.
- Level of Capital Intensity – When the majority of a company’s annual operating profit must be reinvested to drive further growth, the business is considered capital intensive. And, capital intensive businesses require significant cash investment for growth; typically, buyers place a lesser value on these types of businesses.
As business owners consider an exit, it is important to be mindful of the lens through which potential buyers may view a business. While some areas of buyer focus may be less easy to adjust, the good news is that areas such as data and reporting integrity, strength of management team, and diversification of customer base are all amendable and can add significant value to a business.