What Do Buyers Look For When Acquiring a Business?

What Do Buyers Look For When Acquiring a Business?

As a business owner, at some point you may consider selling your company so that you can retire or move on to your next venture. You will, of course, want to get the most value out of the company that you’ve invested time, sweat, and money into, so you need to know what buyer’s will be looking for.

When it comes to making acquisitions, buyers use different criteria to evaluate businesses. Some place more emphasis on strategic factors while others will focus solely on the financial numbers. Despite this, there are common considerations that are important to all buyers.

Your external and internal teams of advisors can help you by focusing on these critical areas as you prepare to sell your business.

Key Considerations

Barriers to entry: Businesses operating in industries with barriers to entry and few competitors are generally more valuable than those operating in commoditized industries with many competitors. One example of an industry with significant barriers to entry is pharmaceuticals. Product development often requires large upfront costs as well as specialized knowledge and expertise. Additionally, completed products are protected by long-term patents.

Synergies: A buyer who can achieve synergies by acquiring another firm will pay more for it. For example, a buyer may be interested in acquiring businesses with complementary product or service offerings that open up cross-selling opportunities. The larger the value of these benefits, the more a buyer is willing to pay. These benefits are realized through increased revenue and reduced expenses; cost savings can be achieved if there are duplicate functions such as sales and marketing, or accounting, that can be eliminated.

Financial health: The company must be financially healthy, and healthy does not just refer to sales. A healthy business is running efficiently, maximizing its potential at any given stage. There is little wasted time and money, cash flow is sufficient to support operations, systems run smoothly, and your team works well together. It’s critical to work with a financial professional to review all aspects of your company to make sure that cash flow is being managed effectively, and that all the processes and functions of your company are running at maximum efficiency. There are three key areas to focus on:

  • Your KPIs – Are you measuring the right KPIs, and are they being managed properly?
  • Is your internal cash flow being maximized?
  • Are you minimizing your risk?

Growth and profitability: Buyers prefer businesses that have grown consistently over multiple years, with expectations for continued growth. Businesses that are cyclical or have stagnant or declining growth are less appealing. The same is true for earnings: upward growth trends are preferable. Additionally, a business is more attractive to buyers if it has above-average profit margins relative to the rest of the industry.

Recurring revenue: The most significant factor affecting a company’s valuation is recurring revenue. Buyers will pay a premium for businesses with predictable and stable revenue streams that are expected to continue into the future.

These revenue streams often come from providing essential and critical goods or services and may be backed by long-term contractual agreements. Examples of industries with recurring revenue models include insurance and software, where premiums and subscription fees are paid regularly.

Customer base: There are two aspects of a company’s customer base that impact valuation: customer concentration and customer quality. A business where no single customer represents more than 5% of revenues would be more valuable than a business where the largest customer represents 50% of revenues. This is referred to as customer concentration.

Customer quality matters because buyers will typically be more interested in blue-chip commercial customers than individual retail customers.

Management team: Businesses that are highly dependent on the owner pose a risk to buyers. This dependence often means the value of the company will decrease once the owner leaves. Instead, buyers prefer that there is an existing management team in place who can continue to run the business after an acquisition. In addition to being more valuable, these companies also attract more interest from a larger pool of prospective buyers—particularly financial buyers who don’t want to be involved in the day-to-day operations of the business.

Technology, systems and processes: Companies that have information systems and standardized processes in place are generally more efficient and have better data for decision-making purposes. These systems and processes also have the benefit of reducing the business’s reliance on its owner, which is more attractive to buyers.

Preparation

It’s important to be aware of what buyers are looking for in order to increase your business’s marketability and maximize its value. M&A Intermediaries can help clients you as you are preparing for a sale by addressing these areas and introducing them to an experienced team of professionals, which should include a CPA, an M&A attorney, a wealth manager and an estate attorney to work together with you and your CFO to maximize the gross and net transaction value in a tax efficient manner.

You will also need to be prepared with all of your financial documentation. You will need to have all your financial records and other information prepared at a level of detail that you may not currently have.

C-Suite CFOs Can Provide Value

At C-Suite, our CFOs have a broad range of knowledge, skills, and industry experience and can help you to prepare your company for sale. We also have a host of other resources, such as our Deal Makers and Legal Resources companies in our portfolio that are available to you during the preparation and sale process. We can be your partner, guiding you through the process, and at a much lower cost than that of a full-time CFO. Contact us today to learn more.

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