Could now be the time to sell the business? Public markets are at all time highs, private equity capital raising continues at robust levels, and M&A activity is…down? How do these and other market factors affect the opportunity to sell a privately held business to another business or to a private equity group? What makes a strong acquisition target?
Value and the future. “So what do buyers consider to be of value and how can I build it into the future of my business?”
I wish this were the attitude of those many owners out there contemplating selling a company. Especially those that have never done it.
What I mean is an attitude eager for knowledge about the topic of M&A, of what matters, of learning how to maximize value by listening to professionals who do this all day every day, and profiting from it. Expressing some interest in understanding the elements that will impact every aspect of their process can only benefit them. Then maybe they would ask how to use the knowledge to their advantage, to build value in the eyes of a buyer or two and walk away confident that maximum value was achieved and both parties got what they wanted.
Instead what I so often get is a hard push on how lucky I am to even be in the running, in the bake off, and how qualified and likely my competition is to win the pending sale mandate that will obviously be huge. The best is when this happens before they share financials or reveal any of the true story. Is this also their M&A sale strategy for those buyers lucky enough to be selected to pay their asking price? Have a number in mind? It’s off, way off. Why even meet with an advisor in the first place?
It sends a bad message, to me and whomever else may be considering taking on a sell-side client like this, for a lot of reasons. The most important one being the signal that this person will continue to be unreasonable throughout the entire process, causing friction, distrust and inefficiency, adding up to no deal at the end of it all. Regardless of how qualified the buyers I bring in are and how strong the offers.
Adding to the problem is that many M&A advisers out there are dependent upon the retainer business model, and eager to maintain the appearance of being busy, that they will gladly in turn promise an unachievable valuation and push their coveted proprietary inside track to getting the deal closed. Having both parties misguided and self-serving almost always dooms a positive outcome. And this is a high opportunity cost – otherwise viable acquirers can see this coming and will likely pass.
Inexperienced sellers and over-reaching advisers aside, M&A can be a viable option for those with legitimate motivations to sell, who are ready to learn how buyers approach value and how companies can take tangible strides to build it, before hand, to maximize opportunity and the likelihood of making it happen. This is the good stuff.
What makes a strong acquisition target?
Value and the future. That’s right, the future. A company’s past only matters inasmuch as it has built defensible competitive advantages that are identifiable, malleable and relevant to the future of its industry. This is most easily visible in the past three years’ revenue trend(s). The viability for continued future expansion is what the buyer is buying, is valuing. But financial analysis and valuations are another topic altogether.
Our purpose here is to identify value building intelligence for any and all businesses remotely interested in creating value realizable at some point in the future when the time is right for an M&A sale.
At the highest level an organization and its activities should be carefully designed and continuously tested to consistently generate two outcomes:
- Sustainable Revenue Growth
- Quality of Earnings
The likelihood of these happening in the future will be the foundation of building, and realizing, value. Why? Because it provides a return on investment. Sustainable revenue growth typically means the business is gaining market share, rather than idling along or losing ground, which comes from building defensible competitive advantages – both tangible and intangible. An active topic for great leaders and the root of most challenges for those that do succeed. Defensible competitive advantages generate free cash flow to pay dividends and/or to reinvest in achieving even more.
Success is the product of identifying a tangible opportunity and customizing a viable approach to fulfilling it through the process of setting goals and tackling the completion, achievement of those goals with open eyes and an eagerness to learn. Value and productivity are borne from doing what you did yesterday even better today.
So let’s consider diving in to the three categories strong leaders are always monitoring to identify value building improvements: (i) Products and Services, (ii) Market Environment and (iii) the Organization itself.
Products and Services
What do you sell? How much of it do you sell? How much more of it can you sell? Whatever a business sells to generate its revenue, be it products, services or a combination of both, the volume of future sales, and the profits achievable are the foundation of value to buyers. Just like you want to see your own expectations met, or beaten by your organization, buyers too need to have the confidence in their ability (as the new owner) to influence top line growth and improved bottom line margins by making small tweaks to what they acquired. After all this is the premise to the build versus buy argument.
When selling it’s a critical responsibility to convey your view of the strengths, the defensible advantages, the bright future of your products and services, and to be convincing. If you don’t drive your point home here, how is a buyer going to ever see things your way? To value them accordingly?
Relevance. How cutting edge are your products and services? How actively do you engage with users for feedback on features functions and benefits, to understand their experience and get useful insights into how to enhance and improve what you sell? How actively do you engineer improvements and roll them out?
Buyers are looking for relevant companies that understand their markets so well that they create innovative, disruptive products that work well and command loyalty. These products are positioned well for the future, not the past. Think about what Starbucks did with good old coffee. If your products work, they can work better. They can look better, feel better and be distributed better. They can be more competitive. This is called product / market fit, and it can always be improved.
Any given market for any given product or service is always evolving in ways nobody can consistently predict. If you’re selling your products and services, you’re on the right path. This is where knowing your market, your competition and your prospective landscape come in to play: product / market fit. Buyers are looking for innovative markets that show promise for competition. Competition ensures a marketplace, ensures a future for revenue and profits. If you’re market environment is growing, your chance of growing with it is good. Depending on how innovative you are with your products and/or services, your chances of growth could be great. This is what buyers are looking for, greatness.
Your organization designs, makes, sells and delivers your products and/or services – this is what makes it such important variable in the value equation.
I lost count years ago of the number of businesses I’ve worked with that have completely out of whack Organizational Charts and Job Descriptions that have no thought put into them. A productive organization chart and effective job descriptions filled with the proper degree of talent will improve communications, efficiency and results – both developmental and financial. Strong organizations can handle change, unexpected setbacks and successes more readily. They are disrupted less than organizations lacking design, purpose, accountability and talent. They endure evolving products, services, markets and economies. They are transferable. That’s what your planning, right?
If a prospective acquirer only wants your assets, tangible and/or intangible, your organization may not survive for long after the sale. You need to be comfortable with this.
No matter what the public markets are doing, whether or not private equity capital is on the up or down-swing, whether or not M&A activity is up or down, there is a potential sale opportunity for businesses with strong products and/or services in a future favored market that has a reliable, dynamic organization behind the wheel. Valuation trends will rise and fall along with their respective markets, but one thing remains true in all markets. Strong companies with great looking futures will always command strong interest and can achieve strong valuations if supported properly.
I encourage all business owners contemplating selling to learn about what matters, and what doesn’t while considering the value of an M&A advisor and how to profit from using the right one.
The right one knows that by definition the fair market value of a business is the price a willing buyer will pay a willing seller in an arm’s length transaction where both parties are duly informed of the relevant facts including:
- Stage of lifecycle
- Defensible competitive advantages
- Size and growth potential in markets served
- Market share
- Diversity and stability of revenue
- Brand recognition and reputation
- Barriers to entry
- Economic conditions in industry and financial environment
- Quality and depth of management team
- Type and quality of assets
Financial condition and ability to provide for ongoing capital requirements
Ability to generate free cash flow and/or pay dividends
Oh, and another important factor is your motivation to sell. This too will come out in the process, so it’s best to make sure you’re motivation is legitimate. The best acquisition targets are the ones who have all of these elements lined up ready to go at the beginning of the process. Surprises break deals.