For both buyers and sellers, an M&A transaction can be a risk. Buyers may fear that an acquired business will not perform as expected post-transaction and might lower their price expectations accordingly. On the other hand, sellers are often offered substantial incentive payments for growing the business as part of the deal and want to maximise these. Therefore, it is in the seller's interest to make the business as sustainable as possible before the sale.
It isn't easy to assess a business's future sustainability without considering its worth and the surrounding factors capable of impacting it. Commissioning a review will reveal whether the company represents a higher risk profile for an acquirer.
Buyers look at these elements to drive your business' valuation down:
- Low profits (usually less than 15% of revenue) indicate a business at risk of losing its profit following reasonably minor issues.
- Inconsistent trading results and weak financial systems and procedures.
- Overreliance on a client or a too-narrow field of activity is considered a high-risk factor which contributes to a lower valuation.
- Lack of personality. A business must set itself apart from competitors and be unique by adopting an effective strategy.
- Ineffective second-tier management.
- A weak new business process, perhaps only reliant on referrals.
In turn, the elements a seller should emphasise to attract a buyer and increase its business value are:
- What sets you apart from the competition? Buyers may have a specific goal in mind when acquiring. They may be looking for particular clients, long-term contracts, a unique positioning in the market, etc. Having this competitive edge, IP and uniqueness will secure you a better deal!
- A consistent and confident growth in profitability (+ decent margins) shows a steady business regardless of who operates it. A self-sufficient business is attractive and increases its value.
- Timely innovation and ensuring you are ahead of the remainder of the marketplace are determining elements in increasing your business's valuation.
Addressing some of these factors will ensure a more sustainable business when it comes to selling, and it will also ensure you have a better business before you do.
If you have any questions do not hesitate to reach out to me on davidb@mandaadvisory.com