Take steps today to avoid being disappointed with the future acquirer’s offer
When the day comes that you want to sell your company, the acquirer will look at your business to identify if they see any risk in acquiring it. There are many areas that could concern them as each company is unique but here are some of the most common ones. Make sure you’re taking steps prior to exiting to ensure your offer price isn’t negatively impacted by any of these:
- Lumpy month over month/year over year financial performance. Acquirers like consistent cash flows, not lumpy ones.
- Poor future revenue visibility. Acquirers like predictable revenue businesses versus ones with uncertain transactional activity. They like recurring revenue models or customer purchasing agreements (as long as the terms of the agreement are favorable) or businesses with a clear history of loyal customer purchasing behavior. When acquirers see a business with low visibility to future revenues, it negatively impacts valuation.
- High potential for loss of key client/customer. Acquirers will evaluate your revenues from top sources and will probe during their due diligence to ensure there isn’t a dynamic brewing that could cause you to soon lose that revenue source.
- High customer concentration…even Vendor concentration. Acquirers will evaluate your company for what risks they see. A key area will be looking at whether your business is too heavily reliant on a single or small number of customers or even vendors. They will fear that a disruption of any sort could be a negative impact to your company’s cash flow.
- Unattractive customer/client or vendor contracts. Whenever signing a contract, also wear the glasses of your future acquirer. Would they like the language you’re signing up for?
- Aging product or service capability. Acquirers won’t place a high value on your business simply because it had a great past. They will evaluate it for what they can do with it going forward. If your product line is getting long in the tooth or a new market trend is emerging that could negatively impact your offering, then this will be of concern to any acquirer.
- Weak company culture or organization. Most acquirers will want some or all of your workforce so of course they will assess this during due diligence. If they believe you have the wrong people in key positions or have underpaid or even overpaid your team, this will factor into their valuation as they may see risk in having to fix this.
There are certainly other factors that can give an acquirer concern, but these are the most common. All of these are in your control to eliminate or at least minimize the risk the acquirer might see, but you will have to use time as a friend to evolve each one in a positive way. Think about your industry and your company to identify where the most common areas of risk could be and develop a plan to avoid them impacting your future exit.
