Seeking a Buyer? These Are the Metrics You Should Focus On
As you aim for an acquisition, potential buyers will also want to know more about specific KPIs that highlight what they deem important. Understanding what metrics acquirers pay attention to is a critical step.
Business owners are often 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 they deem important. Understanding what metrics acquirers 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 how 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 School of Business, 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 (CAGR) 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 a company’s potential longevity and relevance in the market.
Conversely, an early stage company with a smaller percentage of the market but 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 offers 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. Which is why digging into the details of your operating expenses to discover new efficiencies and ensure you’re not leaving money on the table can set you up for a better deal overall.
A few key 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 your staff up 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.
It isn’t only public companies 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.
It’s important to note that while 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 is 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—is often viewed as the sign of a less risky purchase. (EBITDA is earnings before interest, taxes, depreciation and amortization.) If you’re not profitable then mapping a path to profitability is beneficial both for potential buyers, but also as 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.
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Financial Metrics for Exiting Your Company
Prepping for an Acquisition? Focus on these 5 KPIs
As you get closer to an actual acquisition event, focusing on key metrics will ensure you get the best valuation for your business – and a deal that makes sense for you.
The metric: Sales growth
The mission: Aim high
- Sales growth indicates the commitment of management toward improving revenue and product viability.
- Companies targeted for acquisition typically have higher growth by 2.4 percentage points than non-targets1
How to Improve
- Grow revenue with existing clients first.
- Learn what interests potential buyers in your industry, and build product and revenue in those areas.
The metric: Market share
The mission: Domination – or gaining steam
- Growing market share indicates a path toward profitability – gaining economies of scale as it earns more business.
- Market share is also a reflection of marketing effectiveness, sales success and strategy execution
How to Improve
- Dig into your differentiator. It’s hard to outcompete if your offering isn’t notably different.
- Invest in innovation. Acquirers want to know what measures you’re taking to stay ahead of your competition.
The metric: Operating expenses
The mission: Industry average or less
- Buyers use a multiple of an adjusted EBITDA to determine your business value - that's informed by your expenses.
- Lowering your operating expenses will help give your ultimate valuation a boost.
How to Improve
- If you haven’t already, automate tasks where possible. Finance and HR are great places to start.
- Increase your inventory turnover. Stale inventory is expensive, aim to boost your turnover to at least once a month.
The metric: Debt-to-equity ratio
The mission: As low as possible
- A high debt-to-equity ratio can signal a company in financial distress.
- If the metric is too high, your valuation may suffer – or a deal may be deemed too risky.
How to Improve
- Understand what your ratio is and what debt is considered part of the calculation.
- Keep in mind: Debt is a more efficient way to obtain capital compared to an equity raise. Just ensure that you’re not taking on too much as your company grows.
The metric: Profitability
The mission: Get there – or have a plan to
- Private companies with higher profitability than their industry peers are more likely to be acquisition targets.2
- Sometimes low profitability is attractive to investors because they see potential for improvement. But it will impact your valuation.
How to Improve
- Work both sides of the operating income equation – boosting sales and cutting costs.
- If profitability is on a longer horizon and you're looking for acquirers, make sure you document a clear plan for getting there.