- Stable revenue. Buyers want to know that the firms they acquire will be stable over the near term. Low client concentration and a solid pipeline for new business are a must. Suppose more than 20% of the revenue comes from one client, who leaves after the transaction. In that case, the buyer may suffer a significant loss relative to the transaction, given the multiple paid. However, suppose substantial revenues are in the pipeline to offset this and future client departures. Then, the risk is reduced, and the buyer may be left whole or in a better position. Buyers love target firms with low-concentration risk and loaded pipelines.
- Solid Org Charts. We’ve covered the necessity of having a complete org chart in prior articles, but this is paramount to a successful and full-value transaction. Buyers recognize that if the owner of client or employee relationships departs upon closing, the company may be at risk of losing significant client revenue or workforce capacity. The same goes for IT, process, product, or accounting owners. Buyers look for cost synergies, and some departures are welcome or even encouraged, but having a stable and ongoing relationship between the firm and all of its key stakeholders usually equates to predictable revenues and costs.
- Steady and predictable profitability with growth. This combination of elements is at the core of the acquisition. Most buyers want to know that revenues and profit can be sustained after ownership or key employee departures. Typically, this factors into the overall valuation assessment but may also derail a deal if the firm’s current financial performance cannot be sustained with new ownership. Having a combination of low revenue risks or client concentration and a pathway to new revenues de-risks deals and provides easier transaction processes.
- Clean financials. The easier a buyer can understand the past financial performance of firms, the easier it will be to close the deal. Murky financials full of one-time add-backs will make buyers skittish and lead to more earn-out-weighted deals. This is not a deal killer if the seller can back up the financials with evidence and support. An experienced intermediary that provides financial analysis can overcome these buyer objections.
- No representation. Buyers love dealing directly with the sellers as they can negotiate lower prices and better terms with ownership than if the seller retains a qualified intermediary. Additionally, an intermediary will likely have competing offers that leverage away any strength a single buyer would enjoy. Choosing to go it alone is the number one pitfall we see in seller transactions, and the price of the intermediary usually is far less than the loss of value the seller will receive by going it alone.
