12 Drivers to Enhance Your Company’s Value Before Being Acquired
12 Drivers to Enhance Your Company’s Value Before Being Acquired
If you’re a business owner, there’s a good chance you’ll eventually sell your company. While there’s no guarantee that an acquisition will go as planned, there are different ways to improve the odds.
Increasing the probability that sellers get the price that they hoped for and buyers attain their economic objectives can be improved with a few simple checks prior to going to market. The better prepared you are as a seller, and the more attractive your company is financially, the better your odds are of achieving your business sale goals.
This article discusses twelve drivers that can enhance your company’s value before a sale.
What Is an Acquisition?
An acquisition is the procurement of one company by another company. The acquiring company, also known as the buyer, buys all or part of the target company.
The acquisition may be accomplished through a stock purchase, in which case the buyer purchases newly issued shares from the sellers; a merger, in which the buyer and the sellers become one company; or an acquisition of assets, in which the buyer purchases only selected assets from the sellers.
Factors to Consider Before an Acquisition
A business acquisition can be a complex financial transaction that can entail significant risk. As such, there are several factors to consider before an acquisition. The following is a list of some key considerations:
- Objectives: What are the buyers’ and sellers’ goals in the acquisition?
- Timing: When is the best time for each party to sell or buy?
- Structure: How should the acquisition be structured?
- Process: What acquisition process is best?
- Valuation: How should the acquisition be valued?
With your business’ valuation, acquisition structure, acquisition process, and acquisition timing in mind, you can begin to enhance your company’s value before an acquisition.
Drivers That Can Enhance Your Company’s Value Before an Acquisition
There are a number of factors that can enhance a company’s value before an acquisition. The following are twelve drivers that can increase the value of a company:
1. A strong and recognizable brand
The acquisition price for a company with a strong brand is often higher because the acquisition cost can be spread over more sales.
If you have an established and well-known brand, this will increase your company’s overall value. An acquirer should understand that no matter how low they value the acquisition target’s present business model and market, there is still value in its established brand.
If you do not have an established brand yet, it may be beneficial to create one. A strong brand will generate revenue for your company and help you acquire new customers consistently. As stated before, branding also helps increase the value of your company.
2. A well-defined competitive advantage
A company with a well-defined competitive advantage is more valuable to an acquirer because the acquisition target has a sustainable edge over its competitors.
If you can identify and articulate your company’s competitive advantages, this will increase its value in the eyes of potential buyers. However, it’s imperative to consider that not all benefits are equal; some are more valuable than others.
An advantage that is easy to replicate or duplicate is less valuable than a difficult advantage to reproduce. Also, a vital benefit to only a few customers is less valuable than an essential advantage to many customers.
3. Loyal and satisfied customers
A company with loyal and satisfied customers is more valuable to a buyer because the acquisition target’s customers are less likely to defect when there is an acquisition. Customers who have been well taken care of will be more willing to stay with your company once it is acquired. However, if they feel that their needs aren’t being met and they’re not getting the value they paid for, they will leave your company as soon as a better alternative comes along.
It is important to note that customer acquisition costs can be very high; therefore, you must build long-term relationships with your customers to prevent them from leaving.
4. A good reputation
An acquisition target with a good reputation is unlikely to have any significant skeletons in its closet that will come out after the acquisition. Also, an acquisition target’s employees are likely to be more committed to their jobs and less likely to leave when there is an acquisition.
If your company has a good reputation, this will increase its value in the eyes of potential buyers.
5. Proven management team
An acquisition target’s management team is likely to be more committed to their jobs and less likely to leave the acquisition target when there is an acquisition. Also, if your company’s top managers are reliable and have a good track record, this will increase the acquisition value.
It is important to note that an unproven management team can be a risk for an acquisition target. If the management team does not have the experience or skills to run the company successfully, this could lead to significant problems down the road.
6. Robust systems and processes
An acquisition is more likely to survive if it includes a robust system and procedure. A firm with a strong culture is also less likely to have its employees leave after the purchase.
If your acquisition target has robust systems and processes, it will increase its value in the eyes of potential buyers. However, if your acquisition target does not have solid systems and procedures, this may be a risk to the acquisition target because it could create significant problems down the road.
A strong infrastructure in place will increase your acquisition value because potential buyers know they won’t need to invest as much money into upgrading your IT system or making other significant changes after an acquisition takes place.
7. Significant market share
A company with a significant market share is more valuable to a potential buyer because the acquisition target is likely to have a stronghold on its market.
When a company has a large market share, it’s difficult for competitors to enter the market and steal away customers. This makes the acquisition target less risky for an acquirer.
Furthermore, when you have a significant market share, this means that you have a lot of customers who are faithful to your brand and are not likely to switch to a competitor after an acquisition takes place.
8. Strong financial performance
A company with strong financial performance is more valuable to an acquisition target because it has less risk associated with it. When you have a convincing financial performance, this means that your acquisition target’s balance sheet is in good condition and its P&L statements show positive growth over time.
Also, when your acquisition target reports consistently high annualized sales numbers on their income statement (or profit & loss), potential buyers know there is a good chance that the trend will continue.
Buyers are not concerned with acquiring companies struggling financially and may have to take on the burden of restructuring the company to make it profitable. Therefore, it is crucial to maintain a consistent level of financial performance so that your company’s value does not decrease over time.
9. Intellectual property and other valuable assets
A company with valuable intellectual property and other assets are more beneficial to an acquisition target because it has less risk.
Intellectual property can be anything from a patent to a trademark to copyright. If your company owns any valuable intellectual property, this will increase its value in the eyes of potential buyers.
Other valuable assets can be anything from land to a manufacturing facility. If your company has any additional valuable assets that are not intellectual property, this can still increase value in the eyes of potential buyers.
10. Synergy with the buyer’s business
If the acquisition target has synergy with the buyer’s business, this will increase the value of the acquisition for the buyer. When a company has synergy with the buyer’s business, the acquisition target’s products or services complement the buyer’s product or service offering.
The synergy between two companies will increase the acquisition target’s value for potential buyers because synergies can improve sales and profits.
A scalable company is more valuable to an acquisition target because it has less risk associated with it.
If your company can quickly expand its operations into new markets or products, this will increase worth in the eyes of prospective buyers. This is because buyers are interested in acquiring companies that can grow and generate a lot of revenue.
12. Strategic fit
If the acquisition target is a strategic fit for the buyer, this will increase the value of the acquisition for the buyer. A strategic fit is when two or more companies come together, and their businesses are aligned with each other. For example, if your company retails products in the same industry as the buyer, this will be a strategic fit.
When a company is a strategic fit for the buyer, the buyer can use the acquisition to reinforce its position in the industry and compete more effectively against its competitors.
Resources for More Information on Acquisitions
Our mergers & acquisitions advisors/consultants are also available for acquisition support services, so please reach out today if you have business questions or need guidance.
We can help you find the right acquisition target for your business and negotiate the best possible deal for your company.