An acquisition target’s financial performance naturally is central to a potential buyer’s decision-making process. But many other tangible and intangible qualities can enhance a suitor’s perceived value of a company, help close the deal and even land a higher-than-expected purchase price.
Key value drivers vary by individual company, industry and the particular needs of buyers. Most sellers, however, can benefit from scrutinizing their company to uncover the hidden gems and unique benefits it has to offer prospective buyers. Your analysis is likely to reveal negotiation points for price premiums and discounts, but you need to be prepared to defend your asking price.
The price a business buyer is willing to pay is typically based on its perception of risk relative to return. Value drivers are the characteristics likely to either reduce the risk associated with owning the business or enhance the prospect that the business will grow significantly in the future.
Familiar value drivers include proprietary technologies, market position, brand names, diverse product lines and patented products. Some less-obvious value drivers you may not have considered are operating systems capable of improving or sustaining cash flows, well-maintained facilities, effective financial controls and fraud-prevention initiatives.
A solid, diversified customer base
The potential to increase market share or gain access to customers brings many buyers to the negotiation table. These buyers will most likely focus on your customer size in terms of revenue or profitability; the number of new customers gained each year and the percentage they represent of the total base; and the number of customers who leave annually, and their reasons for leaving.
Buyers will ask what percentage of total sales is concentrated in just a few customers, because the larger the percentage, the greater the acquisition risk. The loss of a couple of major customers — which often happens when a company changes ownership — could dramatically harm a business’s future.
A related value driver is your company’s percentage of recurring revenues, or those that can be reasonably expected to occur in the future based on past trends and existing relationships. It may include customers under purchasing contracts. Because of its reliability, this type of revenue has an inherently higher value to buyers than one-time revenues.
Although some buyers make acquisitions to gain access to particular assets, most are interested in companies that have a realistic growth strategy. Your growth strategy could be based on one or more key factors, such as industry expansion, increased demand for your company’s existing products or the development of new products.
Whatever your growth drivers are, they and your larger strategy need to be well documented. Otherwise, a potential buyer may not apprehend or appreciate the growth opportunities your company represents. Well-documented value drivers, in fact, support asking prices and facilitate swifter deals.
One of the most important value drivers in any company is its people — particularly its management team. In addition to star talent, you need executives who are willing to stay with the company following a merger. A solid succession plan that has groomed individuals to assume greater authority is also likely to be attractive to buyers.
In many cases, deal negotiations stumble when a buyer believes that its target’s future cash flows won’t match, much less exceed, historical results. Having a management team that’s willing and able to grow the business can easily translate to a higher purchase price. Potential buyers want to know that this team will be able to maintain valuable customer relationships and the company’s reputation.
Are you ready for buyers?
Knowing the value of your company is one thing; successfully conveying its value to buyers is quite another. Serious buyers will perform comprehensive due diligence, so be ready for them with a due diligence package that includes:
- Historical and current financial statements,
- A current business plan, organization chart and budget,
- Updated descriptions and cost and capacity information for production equipment and other major assets,
- Information about your company from trade associations, independent researchers and other outside parties,
- Contracts and other documented agreements that support deal points,
- Estimates of assets by qualified industry experts, and
- Correspondence with vendors, customers, and strategic partners that verify potential and forecasted growth.
When you sell a business, emphasizing its key value drivers can mean the difference between underwhelming offers and a lucrative deal. The value drivers buyers seek need to be in place before you put your business up for sale. So start thinking today about how you’ll put your best foot forward.