Whether you are considering a recapitalization, a management buy-in or buy-out, or a family transfer, there are key considerations that should be discussed and understood before any company is brought to market.
To identify the best buyer and maximize purchase price, the business owner should be able to articulate the value drivers for the company. Clearly articulating these points can help a Buyer see the value of your business.
Below are 5 key value drivers that must be discussed as early as possible in the process so that all parties are on the same page:
One of the most important value drivers to discuss is your customer. A clear understanding of how a business makes money and who its customers are is essential for any Buyer and deal negotiation.
You also have to be able to speak to how you acquire customers. What is the profile and size of your customer base? How do you engage with them? Having a legitimate sales organization, while not necessary for a successful deal, can help you demonstrate to an interested Buyer that you are working with regular, sustainable customers.
Lastly, you also have to be able to speak to how you lose customers. If your customers are able to abandon your business overnight with little to no switching costs, it will be a red flag. If you have customers that can leave next week without pain and heartburn, that’s not a good thing. While it is not an insurmountable challenge, the deeper entrenched your business is in the customer’s life and business, the better.
2. Industry & End Markets
In addition to your customers, it is imperative to be able to define the size of addressable market. There is no need for detailed reports, but you must have a sense of the number of potential customers and trends in that space. Is your industry growing or shrinking? Is there heavy regulation? These types of extra-company factors can help a Buyer make a decision.
Buyers are also concerned about businesses that are highly discretionary. For example, if your business offers a completely discretionary item, that means the purchase can be put off during downturns and economic uncertainty. That is a big risk in future cash flows and, unsurprisingly, a red flag for many Buyers. Similarly, if a business is very cyclical, it can be challenging for an investor. Most sophisticated Buyers will utilize leverage during an acquisition---leverage and cyclicality is a very risky combination.
To help assuage a Buyer’s concerns, you should demonstrate that your business tracks along with the general economy. If you can show solid financials that is a great sign that your business is not particularly subject to cyclicality or customer discretion.
The two questions you need to address are:
Are there any supplier concentrations? If your business is being influenced by your supplier because of their consolidation or control of the market, that is not a deal killer, but it is something that must be disclosed to the Buyer. It is important to understand the costs and risks of switching suppliers.
Can a supplier go straight to your customer? If that is the case, it makes Buyers very nervous. Most Buyers want to see a fundamental, tangible reason why your business exists. If you are relying on opportunistic inefficiencies, there is a great deal of risk that your business will be squeezed out by larger competitors or those with vertical integration capabilities. You need to demonstrate that your firm will be around for a long time because it is addressing a clear need — and one that no one else can easily replicate.
As the interested investor gets the lay of the land, he will also need to know about the level and type of competition surrounding your company. If you claim there is no competition, Buyers will consider you to be naïve. You will need to effectively be able to address the presence of any competitors and how you differ from them. What are the variables? Price? Service? Location?
You will need to explain why the customer is buying from you. Are they buying from your firm because of the salesperson? Or because of the right price? It may sound like a silly question, but it is fundamental to why a company exists. Do you have pricing power? The more and better you can answer the question, the more value you can demonstrate in your business.
5. Management & Financials
Only after understanding the full environment in which you company exists will the investor begin to look into the company itself. Understanding the key stakeholders and management of the business is absolutely crucial to a successful deal.
When it comes to financials, the numbers will be what they will be. At this stage of the process, the Buyer is probably most interested in seeing how organized your business is. The numbers need to be reliable. Buyers do not want to be trapped in a situation where they have made a deal and in the due diligence process discovers that they were misled-DEAL BREAKER. The more confident a Buyer has in their ability to track the numbers, the more confident they will feel about the deal.
Steve Sink, CBI, M&AMI