What Buyers of Companies Look For
By: John A. Mascarich, Investment Banking Vice President
Every day I talk to buyers of companies and I have a pretty good understanding of what they are looking for based on years of listening to their criteria. Other than a specific specialty, technology or location, buyers look for the following general characteristics of selling companies:
Business is not dependent on the owner
Businesses that are dependent on the owner for their revenue and profit generation have limited attractiveness to buyers because there is so much risk if the owner leaves the business. Sometimes, sellers of businesses think that because they have reached a certain size, buyers of businesses will overlook this very important item. In fact, they don’t. Businesses having other characteristics that are very attractive might appeal to buyers, but the buyers will take steps to limit risk if they perceive that the business is dependent on the owner for sustainability. A purchase transaction structure that allows a buyer to build an organization around the owner and eliminate owner dependency over time will normally be proposed.
Strong management team
Unless a company is being bought to fold it into an existing operation not requiring the continuity of management, or a buyer sees a strategic opportunity that is so enticing that it compensates for the quality of a company’s management, buyers are always attracted to a company with a strong management team that will remain with the company post-acquisition. There are many definitions of a strong management team. But at the very least, a strong management team should be able to operate the company profitably for the foreseeable future under normal business conditions, be able to take the steps necessary to keep the company viable if economic conditions weaken, and then when the economy recovers, be able to bring revenue and profits back up.
Size and profits
Value is derived from how well a seller’s company meets the buyer’s strategic objectives. Businesses that are larger and highly profitable are generally more valuable to the largest, best-paying buyers than are businesses that are smaller and less profitable. Most strategic and financial buyers have minimum size and profitability thresholds in which they consider strategic objectives. Consequently, they selectively consider companies that meet these thresholds. Even if a smaller company meets the threshold for acquisition consideration, it will seldom receive the same valuation multiple as a larger company receives, unless a large industry player has an overpowering strategic reason for the acquisition.
Diverse customer base
A diverse customer base helps make a company stable. Every industry has its own definition of diverse. In some it means thousands of customers, and in others it means no reliance on any one customer for more than a small fraction of the business volume. Buyers analyze a seller’s customer base to determine risk of loss of business as well as the possibility of expansion within the existing customer base. Companies that continue to expand their customer bases every year with little reliance on any one customer are very attractive to buyers. Companies with a significant dependence on one or a few customers tend to have little or limited attraction to buyers due to their lack of marketing prowess and the risk of maintaining future revenue and profitability.
Successful track record
Companies with a successful track record of growing and weathering the swings in the economy are attractive because longevity gives the buyer some assurance that it is taking a reasonable risk that the company will be successful in the future. Companies with longevity have persisted by managing business risk over an extended period of time; have taken advantage at least to some degree of business growth opportunities; have established a defensible market position and reputation, often based on differentiation; and tend to have proprietary products, services or processes, which often lead to strong operating margins.
Established information and operating systems
Established information and operating systems show a buyer that the company is disciplined and sophisticated. All buyers of companies expect that sellers will have quality business and accounting systems with readily available information for analysis and planning purposes. A company’s existing systems may be improved or replaced following an acquisition, depending on the buyer’s information and operating requirements, but having good systems in place is highly desirable.
Financial reporting integrity
Investing in an audit brings significantly more value to a transaction than its cost because an audit gives an assurance of financial credibility. It is hard to exaggerate how important financial reporting integrity is to a buyer of companies. Any negative change in reported revenue and profitability as a result of due diligence is usually met with a disproportionate change in price and sometimes a change in transaction structure or lack of continued interest in the company. If add- backs are found to be overstated, inflated or unsubstantiated during due diligence, financial trustworthiness is compromised. In order for a seller of a company to be able to give the buyer the greatest possible assurance of financial integrity, audited financial statements are advisable.
Clean legal and insurance history
Most buyers expect a seller to have a clean legal and insurance history with readily available and up-to-date stock certificates, contracts, employment and noncompetition agreements, corporate minutes, corporate resolutions, articles of incorporation, and insurance policy information. Having a clean legal and insurance history is particularly important if the selling company expects the buying company to acquire its stock. Many an acquisition transaction is delayed or scuttled because legal due diligence reveals that corporate records are not up to snuff.
Some sellers of companies don’t consider that a buyer doesn’t have to buy. I’ve found that nothing will cause a buyer to end potential acquisition discussions more quickly than a seller having unreasonable expectations of selling price and terms. Most buyers won’t even look at a company if the seller has overinflated expectations of sell price or expects preposterous terms.
Buyers of companies also need to have reasonable expectations. Some buyers of companies don’t consider that a seller doesn’t have to sell to them. I’ve found that nothing will cause a seller to end potential acquisition discussions more quickly than a buyer offering unreasonable purchase price and terms.
Being reasonable is a must for both sellers and buyers of companies, because reasonability and flexibility are necessary ingredients to getting acquisition transactions done.
John Mascarich is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and Vice President at Hilliard Lyons Investment Banking. He can be reached at 502-588-8409 or at firstname.lastname@example.org.