Business owners are usually intimately familiar with the financial and operational metrics that are key to the success of their business. As you aim for an acquisition, however, potential buyers will also want to know more about specific KPIs that highlight what theydeem important. Understanding what metrics buyers pay attention to — and what they'd like to see — is a critical step toward making sure your company puts its best foot forward.
Below are five metrics that buyers will ask about, and the ways you can leverage them to create a more attractive acquisition target.
1. Higher than average sales growth
In a recent study conducted by Intralinks and the Cass Business School, partners at PE firms indicated that, in the current M&A market, they often prioritize high revenue growth over profitability. The increasing sales denote a demand in the market and speak to the company’s current and future potential. In fact, this survey of nearly 34,000 public and private companies over a 22-year period found that companies targeted by buyers had a higher average compound annual growth rate by 2.4 percentage points over the previous three years than their “non-target” counterparts.
What's does this mean for owners? Continuing to prioritize sales growth is important. But so is building products that match the direction of industry heavyweights. That way, your sales growth aligns with the objectives of interested parties and makes it that much easier for a serious buyer to snap up your company.
2. Strategic market penetration
Many buyers view market share as an indicator of potential profitability — after all, you gain economies of scale as your share of the market grows. The actual percentage a buyer wants to see depends on a host of factors — from the company stage and size to the purpose of the purchase. Regardless, it's essential to understand your percentage share, the direction it’s headed and how you'll either increase or maintain it.
A more mature company, for example, may own a significant portion of its market. Maintaining that share — and finding ways to continue to increase revenue even as new competitors come onto the scene — provides a window into the company’s potential longevity and relevance in the market.
Conversely, an early-stage company with a smaller percentage of the market (but that is growing rapidly) may be equally attractive. A company that dominates a smaller subset of a larger market is in a similar position. Organic foods within broader food categories offer a great example: An acquirer may see the small percentage as an opportunity for growth — or view a large percentage as an easier entry into a market they're targeting.
3. Inventory and operating expenses
Potential buyers will naturally want to understand the cost of running your business. So you can set yourself up for a better deal by digging into the details of your operating expenses to discover new efficiencies and ensure you’re not leaving money on the table.
A few examples:
- Inventory turnover. How much inventory are you keeping on hand? Are there inefficiencies in your supply chain that need to be addressed? For product companies, turning inventory once a month is considered a general benchmark.
- Customer acquisition costs.How much does it cost to bring in new customers? Where is the bulk of that spent?
- Reinvestment in technology. A focus on technologies that automate repetitive tasks can free up your staff for higher-level — and, perhaps, more profitable — work. Potential buyers often view this as an investment in the future of the business.
4. The right balance of debt to equity
Public companies aren’t the only ones that should pay attention to how extensively they rely on debt. Private companies — especially those seeking to be acquired — need to be aware of this ratio as well.
Though standards range by industry, the key is finding a balance between using equity — a costlier way to fund your business — and debt, which brings more risk. Technology-based businesses tend to have lower ratios, usually in the 1 to 2 range, while manufacturing businesses are more likely to have debt-to-equity ratios between 2 and 5.
Although many owners may be reticent to take on debt, it’s often an efficient way to grow a business. Keeping tabs on the ratio merely ensures you don’t take on the sort of liability or financial risk that could give a buyer second thoughts.
5. Higher profitability, or a path for getting there
As previously noted, profitability isn’t always a requirement for an acquisition — particularly if a company has taken on significant equity capital to fund itself. Sometimes a high-growth rate and innovative technology or product are attractive enough.
That said, the Intralinks study notes the profitability of private companies acquired over the past two decades was on average 1.2 percentage points higher than those that were not acquisition targets. In fact, high profit margins (measured as an EBITDA/sales ratio) are often viewed as the sign of a less risky purchase. If you’re not profitable, then mapping a path to profitability is beneficial for potential buyers. It also provides a roadmap for using your resources efficiently while continuing to grow.
You’ve poured your heart and soul into this enterprise — and you want to exit on your own terms. These metrics can help place your company in the best position possible when it comes time to negotiate a valuation and execute a deal.
Joe DiRocco is regional president at Fifth Third Bank.
The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and is provided without any warranty whatsoever.
