How Buyers View Acquisition Targets

By Generational Equity


One of the toughest concepts you will need to address as you begin to formulate your company’s succession plan is how to think like buyers about your business. This can be challenging for many entrepreneurs because they are so close to the daily operations of the company that they have trouble seeing and understanding some of the risk factors that buyers might see. And since most entrepreneurs have never sold a company before, having a viewpoint of a buyer is nearly impossible to construct.

Frankly, this issue alone is one of the key reasons you need to hire an M&A professional to guide you because if he/she is experienced, they will have the ability to frankly and honestly give you the truth about how a buyer might see the risk associated with your opportunity.

And that is really what this all boils down to: How much risk will buyers see in your company and what impact will that risk have on their confidence in your projected forecasts? The more you can mitigate key risk factors, the better your opportunity will be seen by buyers. Keep in mind that most buyers use some version of a discounted cash flow method of valuation. The discount rate used is directly associated with the level of perceived risk they see in your business.

So the question we often get is this: What can I do now to begin operating my company using strategies that will benefit me later as I discuss my business with buyers? What is the secret sauce? The good news is that we see four common risk areas that are often associated with privately held companies; being aware of these today so you can begin impacting them tomorrow will greatly benefit you. Here they are:

  • Excessive Customer Concentration
  • Significant Owner Dependence
  • Lack of/Quality of Financial Reporting and Oversight
  • Non-recurring Revenue Streams

If you step back and look at these individually and objectively, it is pretty clear from a buyer’s view why these might be an issue with certain and specific buyers. The key word is “objectively.” Far too often business owners have trouble understanding why generating 50% of revenue from one source is seen as risky by buyers. You believe that concentration like this is a positive because it shows that your business provides tremendous customer service.

Although true, a buyer has to ask, what happens if this client disappears after a year or two? And this is especially the case if the second issue is also present: Are all the accounts closely tied to the owner? Do they do business with the company because of a relationship with the owner alone? When the owner is gone, will they go as well?

Likewise, if due diligence grinds to a halt because you are unable to produce financials, answer questions, or demonstrate that anyone in your organization has a grasp on the financial reporting system, buyers will be concerned.

And finally, if your revenue base needs to be re-built every year, if your sales team is forced to find business every year, and you don’t have a base of clients that place orders with you on an annual basis, some buyers (especially those outside of your industry) will also have issues.

The Impact

So each of these can add risk to your transaction and as you add more risk, your discount rate also rises, impacting the value and possibly your deal structure. How much risk does each equate to in impact on your discount rate you might ask? Well that is tough to determine because it will vary from buyer to buyer. Some folks, especially those who are in your industry and are aware that some of these issues may be standard, will have less concern than others. Generally speaking, a discount rate of 20% will generate a much higher value than a discount rate of 45%. You want to be closer to 20%!

The great news is that with some hard work, diligence and persistence, you can dramatically impact each of these and in short order make your company far more attractive to buyers. Keep in mind that buyers are not going to reward you and pay a premium for your business if you have not focused on or even considered addressing these key areas. So focus and address them!

Drive your sales teams to diversify the client base, begin to delegate some key decisions, ensure that your accounting team has the necessary software to adequately track/report/control expenses, and finally, find sources of revenue that are so dependent on your company that they wouldn’t think of going elsewhere.

If you do these simple things, you will be in a far better position. And, the really good news is that you don’t have to delay your exit for several years while you focus on these because the reality is these are goals that you never fully achieve; you should be proactively working on these four areas all the time. Your business will be seen as more attractive as long as buyers see that you are making progress towards these goals.

The Generational Group is one of the leading M&A consulting firms in North America. Our deal teams specialize in helping business owners achieve maximum deal value even if one (or more) of these four risk factors are present.

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By Carl Doerksen,  Director of Corporate Development at Generational Equity.

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