Know if acquiring before you exit might accelerate the value of your company
Acquirer’s generally prefer to acquire scale. When you speak with active acquirer’s, you’ll often hear them articulate a minimum amount of annual revenue and profit they’d like a business to have before they want to invest their time in acquiring it. They want to acquire something that helps move their needle and generally they will have minimum financial performance levels in mind.
The minimum thresholds for acquirers in the small to middle side of the market is at least $5M, even more like $10M of annual revenues and at least $1M and preferably $2.5M of bottom line profits. As these numbers get larger in scale, the acquirer is willing to pay a reward for that scale. As an example, let’s say you’re doing $10M annual revenue/$2.5M annual net profit and in selling you might get an acquirer to pay you a 5x multiple of your net profit, or $12.5M. Jump that revenue to $20M and the profit to $5.0M and that 5x could jump to a 6x or 7x (or more depending on many factors) which would deliver a much higher payout for you because the acquirer is rewarding the greater scale.
You have two ways of accelerating the scale of your company. Do it organically or do it inorganically. Organically means you invest the time and money into your own company to build the revenue and profit and inorganically says that although you continue to build your business, you invest in an acquisition to accelerate the building of that scale. Here are questions to ask yourself if you’re wondering if it makes sense to consider acquiring a few years before you might consider selling:
- What is the general valuation that an acquirer might place on our current business given its size? (if unsure, give us a call and we can help you get this answer)
- Are our current revenue and profit numbers annually of the scale that acquirer’s in our industry find attractive?
- Do we know of competitors or complementary type businesses that might be for sale and that could add value to our business by bringing them together?
- Do we have the appetite for not only running our business but taking on the task of acquiring and assimilating another?
- If we acquired and accelerated the revenue and profit scale of our business, would we be rewarded by potential acquirer’s for building that scale in our particular industry?
- What is keeping our business from doubling in size? Could we double in size if we invested in ourselves or could we do it faster if we acquired a complementary business?
Many other questions we could help you think through here but the bottom line is this. What would you like to receive one day as a payout when you sell to a third party? If the gap between your desired payout and what your company valuation would be today, perhaps that gap can be filled more quickly by bolting on an acquisition. Call us (949.874.0787) and we can help you assess whether it makes sense to go on the acquisition hunt to accelerate your path to a future euphoric exit event.
