Recently Cass Business School of the City University London and Intralinks collaborated on an insightful study on steps business owners can take to enhance their standing with buyers and thus improve the values offered and/or deal structure when exiting. Entitled “Attractive M&A Targets: Part 1 - What do buyers look for?” I found it to be quite informative.
This study is similar to the Generational Group’s Roadmap for Enhancing Value (REV) that we provide every client as part of our standard evaluation process. Our REV looks at a couple of dozen key valuation categories and rates the client in each. Then, based on that rating, we make suggestions that can be implemented to enhance both the company’s valuation and also its sale-ability in the eyes of buyers.
The folks at Cass and Intralinks have essentially done the same thing, only they analyzed 23 years of acquisitions and reviewed more than 14,000 transactions that occurred during that time frame. Based on their excellent analysis there are several things business owners can do to enhance their value.
Today we cover the first: revenue growth.
Simply put, what they found was that companies with above-average revenue growth make better acquisition targets. This is how the study explains it:
“Target companies have higher growth than non-targets. Our study finds that growth of target companies, as measured by their three-year compound annual growth (CAGR) in sales, is 2.4 percentage points higher than that of non-targets.”
What they have done empirically through their research is prove what deal makers have been saying for years: Buyers are looking for companies that demonstrate a track record of solid expansion AND can provide documentation to support it will continue. It is far easier to convince a buyer to pay several millions of dollars for your company if you prove that it has the momentum to keep growing its top line.
However, what they also found was this:
“Companies are also most likely to become acquisition targets if they have either much higher or much lower growth than the average. Companies in the top or bottom deciles for growth are on average 20% more likely to become acquisition targets in any given year than companies overall.”
That may sound odd. High growth of course makes sense as we have discussed. However, why would lower growth companies be also attractive? Because they have potential. Remember buyers are buying your future, NOT your past.
This is how a VP of M&A with a German company explained it to the authors:
“Low-sales-growth businesses can be a good deal if they are affordable and have the potential to improve sales in the long run by getting funding assistance to develop the operating quality and also improve the business objectives by injecting more capital into the business. The profits can be capitalised on in the long run.”
This view is supported by the senior vice president, M&A of a U.S. public company:
“We would conduct a detailed analysis on the company’s financial position and its operational processes, and try to find a solution to improve sales growth by investing in new technology or by replacing the management.”
What these professional buyers are saying is that if historic revenue growth is not demonstrated, if the CAGR is not consistent over 3-5 years, it is NOT a deal breaker. But the key term in the first quote above is “if they are affordable.” Most buyers are not going to reward you if you have been complacent and your revenue has dropped over the past few years. They may acquire your company but will do so at a discount over a premium valuation, the type of valuation you will get if you have CAGR of 10% for three years vs. CAGR of 2%. The latter company may get acquired but the former will get a higher valuation.
Here is the key to all of this: If you want an optimal deal, work on creating a solid, dependable, consistent revenue stream. And as a corollary, build a revenue base that is not concentrated on a single client or market. In a word, diversify!
As mentioned, we provide a roadmap to each of our clients, which gives them specific action items to pursue and work on and do so, in many cases, while we have them in market. It is a fabulous tool and is very helpful to any owner wanting to eventually close an optimal deal.
If you would like to learn more about our REV document or our services in general, please call me at 972-232-1125 or email me at email@example.com. I would be glad to have a confidential conversation with you about your company.
We also conduct educational exit planning seminars where many of these concepts are first introduced to business owners. If you would like to attend one, use the following link to learn more and register:
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2016 Generational Equity, LLC. All Rights Reserved.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
By submitting my name electronically and clicking the “submit” button, I understand that I am providing Generational Group, Inc., Generational Equity, LLC, Generational Capital Markets, LLC, DealForce LLC, their affiliates, representatives, contractors, etc. (“Generational Group”) my telephone number, which may include a number that is wireless and/or a number that is on a national, state, or other Do Not Call registry or list. I hereby consent and agree to receive telephone calls including any autodialed and/or pre-recorded telemarketing calls and/or text messages (telemarketing) from or on behalf of Generational Group at the telephone number provided. I further consent and agree that telephone calls may be made using automated technology such as an automatic telephone dialing system, artificial or prerecorded voice, or SMS text messaging. Consent is not a condition of purchase. I further warrant and represent that any telephone number provided is not on any state or national Do Not Call Registry and that by agreeing to these terms and conditions that if any number provided is on any such registry, I hereby consent and agree to receive telemarking calls and/or communications including any phone calls, text messages, URLs, links, emails, etc. to the telephone number(s) and/or any e-mail addresses provided. I understand that by entering my name in the electronic form provided, that I am signing my name as equally as if it was my handwritten signature and that it is my intent to provide an “electronic signature” as that term is defined in state and federal law, as well as industry practices for e-commerce.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.