M&A Value Drivers: What Acquirers Are Looking For
The long-term goal of many mid-sized business owners is to one day exit their businesses by selling to an acquirer via a merger and acquisition (M&A) transaction. They can then use the proceeds from this transaction to fund their retirement, start another new venture or accomplish other goals.
If this is the goal you have for your business, you should be doing everything you can to maximize the value of your company between now and the time you wish to sell. One of the most important merger and acquisition strategies is to focus on key M&A value drivers that will increase the value of the business to potential acquirers.
What Acquirers Are Looking For
Most buyers are looking for certain things in businesses they acquire. Specifically, they want to know about:
- Projected future cash flow and earnings.
- The timing of these projections, or when will they materialize.
- The certainty of these projections, or how risky they are.
To maximize the value of your company in a future M&A transaction, you should make financial and management decisions with the goal of increasing future cash flow and earnings and reducing the uncertainty that they will occur. One good way to do this is to strive for diversification in your sales and revenue streams, as well as within your product and service mix and among your customer base (both geographically and demographically).
Another one of the key M&A value drivers is the quality of your financial statements and integrity of your accounting processes. You should be working with a CPA or CFO services partner who will ensure that high-quality audited or reviewed financial statements are being prepared regularly. You should also be using accounting and inventory software programs with the right level of sophistication based on the size and complexity of your business.
Sometimes, it’s not a matter of software being insufficient or outdated; rather, it’s a matter of understanding and maximizing the potential of your current software. For example, one client we worked with was getting poor data out of their inventory software. Upon closer inspection, we saw that they weren’t using the software properly. Another client wasn’t getting the reports they needed out of their accounting software. Instead of buying a brand new accounting system, they were able to upgrade their existing system with an Excel-based reporting solution.
More M&A Value Drivers to Consider
Here are a few more M&A value drivers that can help increase the value of an M&A transaction when you decide to sell your business:
Strong growth opportunities — Maximizing the ROI on an acquisition requires growing the acquired company, so this is one of the most important things buyers look for. Therefore, you should prepare a strategic growth plan that spells out your company’s growth prospects over both the short and long term. For example, can new owners expand the business into new geographic territories? Can they take advantage of new technologies or tap into new niches?
Deep management bench — Most acquirers insist that a strong management team be in place before they consider paying top-dollar for a business. So begin building a deep management bench long before you plan to exit the business. Start by sharing decision-making authority with others on your team and delegating important tasks. Your business needs to be able to run smoothly after you’re gone.
Strong competitive advantages — Does your company have a USP, or unique selling proposition? Is there something unique about your business that makes you stand out? For example, this might be exceptionally high quality, superior customer service or the lowest price. If not, you should identify and refine a competitive advantage now.
Minimal customer concentrations — The more highly concentrated your sales and revenue are with a single customer or handful of customers, the greater risk there is for acquirers. This is because the loss of just one major customers could significantly impact the company’s financial position. Try to spread out your sales and revenue among many different customers, instead of concentrating them among one or just a few customers.
If your long-term goal is to one day exit your business by selling to an acquirer, you should be doing everything you can to maximize the value of your company between now and the time you wish to sell. The best way to accomplish this is to focus on key M&A value drivers that will increase the value of the business to potential acquirers. An on-demand CFO partner from an outsourced CFO services firm can identify the M&A value drivers for your business and help you focus on improving them before you perform an M&A transaction.
Arthur F. Rothberg, Managing Director, CFO Edge, LLC