The most important thing buyers look for when considering an acquisition is usually profitable growth. They want to know for sure that they can take what you have built and continue to grow it; otherwise, cost savings would be the best opportunity for value creation post-purchase. Therefore, they want a business that does something unique that other companies, start-ups, or technology can’t easily replace.
What Buyers Focus On
Buyers tend to focus on a few key areas when considering acquisitions. They carry out an extensive financial analysis concerning growth, earnings, risk, and leverage. These metrics help them predict the probability of a company’s growth after the acquisition.
High sales growth indicates the company has something unique or valuable to customers. Past sales growth, especially paired with a structured, repeatable process for driving sales forward, is substantial leverage for a seller.
Before the acquisition, buyers look at a company’s past three or more years’ sales growth. This information helps them understand the company culture and indicates whether management can achieve higher sales and revenue.
Buyers prefer high rates of sales growth and are open to acquiring such firms at high valuations. Therefore, fast-growing companies attract more attention and value from potential buyers.
On the other hand, companies with much lower sales growth are also likely to become acquisition targets because buyers are interested in such companies if they are affordable and capable of improving sales with funding assistance. In those circumstances, buyers can make such companies profitable in the long run by improving the quality of operation, enhancing business objectives, introducing new technology, replacing the management, etc.
Regardless, buyers carefully consider whether such enterprises have potential business models conducive for them. They also check the probability of fixing the weak areas and making the most of hidden synergies.
Profitability and value are linked. High-profit margins relative to industry peers are a sign of success and, therefore, interest buyers. Buyers also look to see if the company’s valuation and business description suit their needs, making acquisition less risky and increasing the chances of success. High profits also indicate a faster return on the buyer’s investment.
If a company has low-profit margins, then the buyer has the chance to acquire the company at a lower valuation, then grow them via capital investment and renewed management. Low-profit margin companies are good acquisition targets to enter a new market. However, buyers ensure that a company has a reasonable growth rate or a new technology, making it unique.
What risks jeopardize the company’s future success? Mainly, what company-specific risks would the buyers face? Buyers look at things that management can influence, like customer concentration problems, over-reliance on a handful of key employees, or product obsolescence.
Buyers want to know whether your company has an expansive or diverse customer base. Customer concentration is a serious issue that creates vulnerabilities for buyers. They want systems that bring new business and, preferably, multi-year customer contracts that ensure recurring income.
Also, what is the ratio of high-margin to low-margin accounts in your business? A majority of low-margin accounts raise a red flag for investors or buyers.
Over-reliance on a Handful of Key Employees
Buyers want to know about the people who are instrumental in the success of your business. They will look at the quality of your management team. How dependent is your business on you or some of your key employees, and what will happen after you exit?
They want to see your succession plan and know the strength of your HR processes. What does your company do to hire, train, and retain talent? How will you ensure that key employees will not leave when you exit?
If the company’s product becomes obsolete, it no longer remains profitable and competitive in the marketplace. Especially with technology-based products or services, buyers will evaluate which could be more prone to obsolescence. They want to know about your innovation efforts and expenditures. Do you have the right people, processes, and systems to combat this risk?
Related: The Three Value Levers – Earnings, Growth, Risk.
The business should possess good employees and management. Owners need to demonstrate that they have pushed decision-making down the organization and developed robust processes enabling the business to operate without them.
To do that, ask yourself:
- What combination of critical factors ensures successful outcomes for your decisions?
- Which metrics should you meet to achieve success?
- Have you mastered the strategy to achieve success?
- Can you determine the range of outcomes resulting from your decisions?
- What is the probability of each outcome?
Buyers want to know if you have deployed appropriate decision-making tools, such as case-based decision analysis, qualitative scenario analysis, information markets, etc., capable of helping you work through incomplete information. Do you understand which tool works best for which decision?
Owners need to develop general protocols for decision-making in their companies to avoid behavioral and political pitfalls. Using proven decision-making tools, even in situations that seem unambiguous, helps in identifying potential biases.
Managers and lower-level employees should have answers regarding how and when to make decisions.
Also, buyers want to look at the resources and capabilities you have created to gain a competitive advantage, increase profitability, to sustain growth. They want to ensure that you have things in place to provide a smooth transition post-acquisition.
How a Strategic Plan Fits in with What Buyers Want
Now that it’s clear what buyers are looking for, the remaining question is whether the company’s current state is due to luck or, worse, directly tied to whatever the present owner is accomplishing single-handedly. A strategic plan that traces back to these critical factors: growth, earnings, risk, and leverage shows intention. It means that company operations are aligned to optimizing these factors. Given that strategic plans typically cover a 3-5 year period, it is reasonable to think that the annual plans align with these goals.
A company that not only has eyes on the right goals but makes decisions on a daily, monthly, and annual basis to work toward those goals by necessity has processes and structure to reinforce that operating model. That’s difficult to assess from data covering only a snapshot in time, but it’s ultimately what a buyer is getting post-acquisition. A good strategic plan is a signal as to what’s going on under the hood.
Ultimately, the strategic plan should outline how the organization will succeed going forward, even if current management were to sell the business. It documents how the organization will sustain growth and future earnings, where risks lie that could compromise future success, and how management expects to overcome those risks. A strategic plan provides the roadmap for potential buyers on how they can sustain success, and thus, is a critical piece in value creation and exit.