Three Things Acquirers Look for When Buying a BusinessMar 31, 2023
Recently, I joined forty influential entrepreneurs on the slopes above Courmayeur—Ski People of Influence. I rode the ski lift with a mix of BASE jumpers, counter terrorism agents, and beauticians with one thin in common: they’re all successful entrepreneurs.
From the outset, we were encouraged to ask deep question have—over meals, on the slopes, in the chairlifts—and have ‘brave’ conversations. And we did. Humbled by location, fresh air, exercise and diversity, we all connected and allowed ourselves to be vulnerable.
We discussed growth and giving back to our communities. We debated transitions and business models. We shared experiences of acquisitions and exits. And the question on everybody’s mind: how do I build a more valuable business that will attract an acquirer.
The decision to sell can be driven by numerous factors, such as financial constraints, time commitments, or simply a desire for a change. Whatever the factor, if you aren’t thinking about how to make your business attractive and valuable, from the outset, you’re in for trouble down the line.
There is nothing wrong with thinking about the end-game. In fact, if you aren’t considering exit options, you’re doing yourself and your employees a disservice. That’s because thinking about the end-game forces you to build a healthy, valuable business.
Three Things Acquirers Want…
When an acquirer looks to buy a business, they typically evaluate various aspects to determine if it's a good investment. While criteria can vary depending on the acquirer's objectives and the specific industry, the top three things they generally look for are:
A strong financial history and a healthy balance sheet are crucial. A potential buyer will scrutinize your revenue, profit margins, cash flow, and growth trends to assess your company's financial health.
They will also evaluate the stability of revenue streams, particularly recurring revenue, and the business's ability to generate consistent cash flow. Buyers want a stream of recurring revenue and are willing to pay a premium for businesses that have it, as it reduces the risk and uncertainty associated with future cash flows.
Start creating subscription-based models, long-term contracts, and strong customer retention rates are all indicators of a steady revenue stream.
Take Stephanie Breedlove, who sold her payroll company, Breedlove & Associates, for a staggering $54 million. A significant factor in the company's success was the recurring revenue from long-term contracts with 10,000 clients, making it a highly attractive acquisition target.
Scalability and Growth Potential
Acquirers are interested in businesses with potential for growth and expansion. This can include untapped markets, opportunities for geographic expansion, or the potential to develop new products or services.
Focus on creating a scalable business model, with efficient operational processes and systems in place that can support growth without significant additional investment. Make sure you have effective sales and marketing strategies, streamlined operations, and robust technology infrastructure.
Invest in a Business Operating System (BOS). Systems like Metronomics deliver steady, predictable business growth and profitability. They bring an intense focus to your long-term businesses goals—and every business (startup to multinational) should have one.
Take Ian Ippolito, who sold his company, vWorker, for millions. Ian grew the company to 15 employees and $11.1 million in annual revenues before selling the company to Freelancer.com. vWorker had a scalable business model that allowed it to accommodate a rapidly growing user base without the need for substantial infrastructure investments.
Acquirers want businesses with a unique value proposition, such as a strong brand, proprietary technology, intellectual property, or exclusive distribution agreements. A competitive advantage ensures the business can maintain or grow its market share in the face of competition, which is a critical factor for long-term success.
Carving out a niche is vital for long-term success because it enables your businesses to maintain or expand its market share despite the presence of competitors. Work on developing a unique value proposition to differentiate your business in a crowded market. This will help you attract and retain customers, and drive sustained growth.
Take Dollar Shave Club, a subscription-based razor and grooming product company founded by Michael Dubin. The company's competitive advantage comes from its unique business model, offering high-quality razors at a fraction of the price of its competitors. Dollar Shave Club disrupted the traditional razor market by eliminating the need for customers to purchase expensive razors from brick-and-mortar stores. This advantage helped the company achieve a high valuation, ultimately being acquired by Unilever for $1 billion in 2016.
Regardless of where you are along your entrepreneurial journey, it's essential to understand what buyers are looking for in a potential acquisition and how to create a more valuable business.
By focusing on building a steady stream of recurring revenue, scalable business systems, and a clear competitive advantage, you can dramatically increase the value of your business and make it an attractive target for potential acquirers.