By Ian Altman, a business expert who helps his clients discover how to modernize sales and marketing for today’s customer.
Business owners often ask me, “What should we be doing to make our organization a good acquisition target?” As someone who has successfully sold companies in the past, I’ve identified best practices of attracting a merger or acquisition.
Often, what you think makes your firm appear valuable to potential buyers is not what really matters.
Many CEOs believe that they just need to hit a certain dollar figure in revenue or a specific level of profit. Revenue and profit are certainly valuable measurements, but they don’t tell the full story.
All Revenue Is Not Equal
Let’s start with a quiz. Which company is more valuable?
- Company A has US$20 million in revenue.
- Company B has US$12 million in revenue.
Both make the same profit.
It turns out that this is a trick question. You don’t have enough information to determine the valuation.
Here’s why. Company A earns its revenue by completing one-off projects. Company B receives monthly recurring revenue in the form of subscriptions. Additionally, the renewal rate of the subscription is high, at over 85%. Thus, Company B is more valuable—more attractive to buyers.
Acquirers evaluate potential risk to the existing revenue stream, as well as the potential for growth. A monthly recurring revenue with a high renewal rate means the buyer can feel confident in future revenue. High renewal rates also indicate that the company delivers great value to its customers as they continue renewing their subscriptions.
Companies Buy Engines, Not Heroes
As CEO at my prior company, I was proud to be involved with every major sale. For an acquiring company, however, my involvement was a red flag. What buyers saw is a potential weakness in our sales method. Instead of taking part in sales, I needed to build a repeatable sales process.
If you build an engine to grow revenue, then acquirers will believe they can simply add fuel to the engine to accelerate growth. Build systems and processes for how you grow your business. Systems drive value because they are not dependent on individuals.
What Matters Is the Problem You Solve
It’s common to group customers by demographics like industry, size or geography. But what counts is why those customers are working with you. And to answer that question, you must first ask yourself: What problem is my company solving for the market? What can’t my customers accomplish without our services? These might seem like simple questions, but their answers offer profound insight into your business.
Our research shows that when approving a purchase of a product or service, executives first ask, “What problem does this solve, or why do we need it?”
If you clearly articulate the problem you solve for your clients, then an acquirer can quickly evaluate if their customers could benefit from your offering. If you can show that you solve that problem across industries, then the acquirer can see how to scale the business. They might even have clients facing the same problems in another sector.
Revenue Allocation Requires the Right Perspective
If you make the mistake of overlooking the problem you solve, you might mistakenly allocate revenue by industry.
We’ll use a law firm as an example. Let’s say you own a law firm that maintains several practice areas: life sciences, construction, healthcare, technology and infrastructure. Your clients come to you because you address a variety of matters for them. In each project, however, you should allocate revenue based on the problem you solve.
Consider this: One of your clients is an investment fund financing a new highway in a developing country. Should you allocate the revenue to finance or infrastructure? Your client needs to solve an infrastructure and coordination issue with that country. Simply having the finance background would not qualify you for the business.
The common mistake in revenue allocation and reporting is to focus on your view of the world rather than your client’s perspective.
Find Your Match
Follow these steps if you hope to attract a potential merger or acquisition:
- Assess your revenue. Recurring revenue is worth more than one-time revenue.
- Build growth engines that go beyond individuals. Systems are scalable; people are not.
- Focus on the solutions you deliver. Shift your perspective from who to why—grouping customers not by who they are, but by why they come to you.
- Similarly, allocate revenue based on what your client needs.
If you can accomplish these tasks, you’ll be well on your way to attracting potential acquirers. You’ll also be building a business that is valuable to any shareholder—even you, for as long as you own the business.
The Entrepreneurs’ Organization (EO) helps leading entrepreneurs learn and grow through peer-to-peer learning, once-in-a-lifetime experiences and connections to experts. Discover EO today!
Categories: FINANCES general LEADERSHIP