05 Dec Mergers And Acquisitions: Maximizing Your Company’s Valuation
Mergers and acquisitions has been a hot topic in the IT channel this year, especially in the minds of owners and shareholders considering the future of their businesses. Many of the published articles have been focused on the legal and technical concerns, but I wanted to discuss the strategy of selling your business to get the highest possible return.
Positioning your business for a big acquisition or merger is all about crafting a strong business case that you can defend with data. What are your differentiating strengths? What makes your organization a good investment for another business to acquire? How can you use financial metrics to bolster your case? What aspects should you focus on before beginning conversations to sell your business?
To answer these questions, here are the practical steps that will help put yourself in a prime position for a merger or an acquisition.
Building a strong sales pitch
Owners placing their IT services firms in the market to be acquired will need to make sales pitches to other companies. Therefore, every business should be examined with a critical eye on its strengths before crafting that value proposition to others.
The first step is to review the most attractive aspects that may differentiate your firm from its competitors. Consider any unique product or service offerings, niche market segments you serve, intellectual property you may have developed, and your existing book of business. Don’t forget some of the things you may take for granted – such as how well the operation runs – these points will strengthen your case. Best practices, years of experience, robust internal processes, and key vendor or partner relationships are all things that have value to investors.
In addition to your company’s strengths, it is wise to consider any weaknesses that could prevent an acquisition from happening. Potential red flags like outstanding debt, slow growth rate, or large accounts receivable balances must be addressed before pitching your business to a potential suitor. Critically assessing your weaknesses will allow you time to make corrections before entering the marketplace and set realistic expectations for the negotiations.
Use metrics to back up the sales pitch
Once the core strengths of your business have been established, it’s time to sit down and validate the pitch with as much concrete information and numbers as possible. Having your finances in order is not difficult, but it is critical to maximizing a deal. Those interested in buying your firm will need to see full financials, and you must be prepared to explain those details with confidence.
Ideally, each of your strengths should be backed up with multiple data points. Start with the big picture and drill down to the details.
Some key metrics to focus on include:
- Revenue growth rates
- EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) to sales ratio
- Debt to EBITDA ratio
- Total annual sales
Those are all essential factors when evaluating an acquisition target.
Follow up those metrics with other data points that highlight the specific strengths of your business. Have a hot new product or service? Show the growth rate, total sales, and margin of that specific asset and how it impacts the future of the business. Do you excel in operations? Calculate metrics such as gross margin, cost model breakdowns, or even time utilization. Have you implemented recent initiatives to tackle long-standing issues? Document that you’ve implemented new software, innovative processes or best practices and highlight the outcome of those efforts. What about your valuation? Can you back up the assessment of your assets with hard data? Never forget, cash is king when it comes to valuation, so demonstrating the ability to produce a consistent, reliable return is a major plus.
The more data to support the strengths of your business, the easier it will be to prove those claims to an acquirer. It also demonstrates that you know which metrics matter and track them.
Setting up for success
A successful existing business does not guarantee a successful future business, so building a story of current strengths and setting the stage for what is yet to come is crucial.
Your company may have strong financials, excellent processes, and a validated valuation, but do you have a plan? What is the total market opportunity for your business? Have you forecasted a healthy sales pipeline? Are there new markets to pursue or perhaps a new product line or service that will boost growth in the years to come?
Everyone knows that no business is perfect. Great organizations are led by those who embrace the challenges, develop plans to address those hurdles, and then execute relentlessly. Does your firm have a track record of following this type of methodology? What initiatives are in place to address any of the weaknesses? Your ability to paint a picture that is both positive as well as realistic will make it easier to predict what the future holds for your business.
Bring it together
Remember, prospective buyers are going to look at the potential revenue they will gain through the purchase or merger. Telling the story of your business through strong financials, a validated valuation, and a solid future business case will contribute to your receiving the largest payout possible.
About The Author
Ryan Goodman is one of the Founders of ConnectBooster and serves as it’s President. He primarily focuses on working with working with businesses to help them with their cash flow issues.
When he’s not working, Ryan enjoys spending time with his wife Amanda and two boys, Owen and Liam. He plays softball and golf in the summer and is an “avid sledder” in the winter with his sons! He also enjoys working out regularly and reading about news in the IT Channel.