Let’s look at things from the perspective of what you don’t want to do
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. To avoid giving the acquirer pause in buying your business and reason to lower their offer price, make sure you’re taking steps prior to exiting to avoid these misteps:
- 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 and/or reliance on ownership. Most acquirers will want some or all of your workforce so of course they will assess this during due diligence. They will also look closely at the role ownership plays to determine if the value they play walks out the door when the deal is done.
There are certainly other missteps to avoid but these are some prime ones. All of these are in your control to avoid 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. Avoid these missteps and get yourself on your path to a future euphoric exit.
