Tips for Acquisitions & Business exit
Let’s have a look into the insights of what exactly a business acquisition is and how it is related to a business exit.
One question every startup founder and entrepreneur finds themselves asking is, “How can I build a company that will one day allow me to exit successfully?”. For every entrepreneur, it is a thought in the back of your mind to have a strategic exit plan or preparing yourself when your business is not going how you planned. And an acquisition for some is the stepping stone of a successful business exit for others.
Let’s have a look into the insights of what exactly a business acquisition is and how it is related to a business exit. This will help you analyze the way you can grow your company according to your business exit plan by providing you tips for acquisitions and business exits.
For a long-term successful strategy, it is essential to have a strong understanding about business acquisitions and company growth. Whether you are a large company dominating the market share or a small business in a niche market, acquiring another company is a business defining landmark for your success story.
Micro-entrepreneurs normally sell their small businesses to larger companies, to add new parts to the group structure. It is a well-planned strategy for buyers to fill the clift of the line of products. In simple words, it is merging an existing businesses with your own and letting the company grow in terms of technology and advancement under one roof. In addition to this, adding new sections to your businesses is a great way to benefit from your startup acquisitions, such as Google acquiring YouTube, or Facebook and Instagram.
With an understanding of the basics of acquisitions, let us begin with the tips for acquisitions and business exit, which will give you a clear picture of the do’s and don’ts while buying or selling your business.
Effective strategy and tips for business acquisition:
Like everything in life, business acquisitions for your company has its pros and cons. So, you should outline the most important factors for your business. We have gathered all the necessary information for you to build a perfect business acquisition strategy, and important tips to help you achieve growth in your business.
- Investigation: Once it is decided by the acquirer to target a specific company, the principal focus is to investigate in detail about the target company’s assets and liabilities. The entire process of this investigation is called due diligence. It helps you research the benefits and costs to be applied, and other vital aspects by providing you with correct and valuable information about the target before making any decision. To make sure that the business is worth buying, due diligence is an essential aspect among the tips for both acquisitions and business exits.
- EBITDA: When it comes to gathering quality information about the target company, it’s essential to know about the Earnings Before Interest, Taxes, Depreciation, and Amortization’ (EBITDA). It is a key indicator to know the target company’s financial performance. Don’t forget to exclude the non-cash and non-periodic items before calculating the EBITDA of the particular target. Besides this, if you are a buyer and want to obtain debt financing, calculating EBITDA is a must.
- Know the Net Worth of the target: The smart move is to know about your target’s financial condition. There must not be anything hidden or suspicious when it comes to the financial metrics. Go through the company’s balance sheets before any decision you make. Grab the entire history of the target’s profit and loss ratio after going through three consecutive annual reports. Also, study the income tax return reports to ensure the correct payment of the taxes to the IRS. The government audits and the results of those audits may impact the acquisition.
- Find out the Trade’s secret: Another tip for acquisitions is trade secrets, which is all about knowing the intellectual properties of your target. The buyer should have a keen interest in identifying and understanding the target’s used technology, created patents, copyrights, and trademarks. Don’t forget to analyze if there is any IP (Intellectual Property) litigation as there may be the third party right over the specific intellectual properties.
- Keep a track on Asset Inventory of your target: Are you reviewing all the assets of your target? If yes, then one of our tips is to go through every lease contracts, staff files, manuals, payroll records, and a copy of the pension as well as the profit sharing plans.
- Build a Skillful Team: For due diligence, do not forget to create a team of experts who will help you obtain even the minute details of the target’s business. You need advisors like lawyers, valuation experts, accountants, and bankers who specialize in investing. In short, a team of professionals is required to cover the period of sales to marketing and finance to operations. Always remember, a little negligence in due diligence can spell disaster for you later on.
After understanding these areas, the next part to focus on is business valuation. It is a well-known fact that the value of any business consistently goes up and down with time. If you want to sell your business or company, it is essential that you keep a continuous track on the business valuation as well. Even as a startup business, if you require fundraising or crowdfunding, knowing the value of your company is a must. Keep reading to know more.
How to value your company and one that makes sense?
The next major point in these strategical tips for acquisitions and business exit is the valuation process. Business valuation is to know your companies worth and economic value. The valuation process helps to identify the financial aspects of the business based on the previous performance, data, assets, and liabilities and future performance in the coming years.
We have summarised the approaches into three significant parts: an asset-based approach, market-based approach, and an income-based approach.
When we talk about the market-based approach a few things comes into the consideration. These important factors include the estimated value of assets, profit records(includes the appropriate calculation of profit after tax using as the earning price), count of the revenue or the sales price, calculating the EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortisation) and others. Identification of similar businesses or corporations and the right multiple factors is necessary to process the calculations with the chosen variable.
The market-based approach as mentioned above is classified into two categories as follows:
- The Guideline Transaction Method: This includes the identification of the sales of the company’s assets or the transactions made against comparable companies purchases. The financial risks are calculated via GTM to forecast the profits and loss of the company.
- The Guideline Public Company Method: To analyze publicly traded companies, this method is the most efficient one. The calculation of EBITDA falls under this category. This analysis for publicly traded company is done similarly to the subject company.
This asset based approach is straightforward and effective. It primarily concentrates on the concept of the net asset value of the company amongst the total assets the company has, deducting an amount of the liabilities. It determines the precise cost required for re-building the business.
The concept defines that the actual asset value of a company may differ from the recorded value of the asset in the case if the company manufactures or owns a specific product by itself. Companies involved in real estate that need to hold these investments refer to this kind of approach.
When it comes to analyzing an amount of revenue, one prefers to follow the Income-based approach. The two basic Income-based criteria are as follows:
- The Capitalization of Cash Flow Method: The business valuation follows this criteria, when the business running rate and profit rate is considered to be steady throughout the valuation period.
- The Discounted Cash Flow Method: When the future growth rate of the company tends to vary, then one should follow the DCF method. This method is the most preferred when debt repayments are to be measured. That means we are calculating the present value for the future transactions including the amount of debt and equity. As a benefit, a publicly traded company can know the value of their investments whenever they require the information.
Until now, you might have understood some of the important tips for acquisitions and business exit that has been shared with you. Now it’s time to ask yourself an important question, why do you want to acquire a business? Is acquisition going to be a real opportunity or a financial burden for you? Let us find out.
Which metrics to test and questions to ask?
Acquisitions are considered to be the heart of growth strategies. So before going through the essential evaluation metrics to test, the reasons for an acquisition should be crystal clear. It is critical to understand whether you’re making a sales or product driven play, increasing your capacity or footprint in a target market, eliminating a competitor, and so on.
Based on the type of reason for acquisition, evaluate the following metrics:
- Sales report of the company (Current Value as well as the Future Value): Achievements take a lot of change. Any business idea must be flexible to accept any difference with the changing technologies and trends. Over-year sales growth record and the forecasted growth rate of the upcoming years are taken into considerations. Are you ready to make the necessary amendments in your business with the changing trends?
- Customer Satisfaction: To enhance sales growth, customer satisfaction becomes another crucial metrics. After all, the customer is always right. So, you need to ask yourself: What does your customer require?
- The strength of the Industry: Not only the customer, but the industry itself is also important for finding your position in the market. The companies potential determines the performance growth based on the number of sales against the number of employees. The total revenue generated against salary costs will decide the balance sheet stability based on the profit and loss records.
- Commitment: This is an unseen asset of any company. Delivering the services as desired or before time to customers will help your company increase its market value and the profit. How committed are you with your work? Do you deliver the services on time?
- Earnings Per Share: Companies profitability is also measured regarding earnings per share (EPS) and undoubtedly is an important metrics too. A portion of the profit is distributed equally between the outstanding share of the common stock which is figured out using the balance and income sheet as well as the net profit of the company. Have you maintained your balance sheet and income statement to calculate the EPS?
- Business Valuation: Due diligence and business valuation are the most important metrics to be tested. It is the stepping stone which will lead you on the journey of an acquisition. We have already covered different approaches of business valuation above, but for convenience, we conclude the valuation as the whole record of the company’s historical database. It includes the performance potential, assets records (especially intangible assets), depreciating and non-depreciating property records.
Finding the right buyer and price
Finding the right buyer and price is a hard nut to crack if you want to sell your business. This section includes the key points to consider for accessing the available options before selling the company.
- A strategic buyer will always look for long-term growth with your company. If your current business values are capable of meeting the buyer’s future value, the strategic buyers will give you a higher payoff. So it is better to choose a buyer that knows the fair worth of your business. The cost of the assets either depreciating or non-depreciating, tangible or intangible, etc. Prepare the growth chart of your business sales and the revenue generated.
- Financial buyers merely invest in the business. They are capable of turning around the status of the company to make it more profitable. They usually purchase, invest and resell the business for stable business growth for themselves. Financial buyers own a platform business, and by acquiring them, they add more candidates and products/technology beneficial for the existing one.
- If internal transitions is not an option, it is better to seek a broker’s help, as they can provide you with a database of large business owners. With their assistance, you can get the internal information of keen investors who may be proven to be the right buyers for your business.
- A competitor can also be a right buyer for you, as they are willing to acquire your business if it has good market value.
- To find the right buyer and to get a fair price, you may also approach business advisors, investors, and bankers. Opening your network more increases your chances of finding the right choice.
Know when to walk away from the deal
If you are standing on the edge of an acquisition, it is essential that it must be a fair deal for both parties involved. As discussed, evaluating the target’s company potential earnings and market value are crucial to know the real worth of the business.
Having sufficient knowledge about the worth of the business either as a buyer or a seller decides the farest buying price. In the worst case scenario, if the buyer is not ready to pay the estimated amount, then they should take a step back and leave the deal on good terms, without affecting any future business relationships.
Due diligence will also help to decide the amount and if the seller is not getting the desired pay off, then the best alternative is to leave the deal after offering a last alternative figure on which both parties may agree. Leave the deal if your instinct says that there may be trust issues and the company hand over is not going to be hassle-free.
It will be better if you are ready with a list of objectionable or unacceptable things before the negotiation, and give a copy of it the other party. If the other party agrees to it, then move ahead with the further talks, otherwise leave the deal on good terms.
Mismanagement and an undesirable working culture may not match your business requirements. For buyers, it’s important for the target acquisition to have a similar or manageable working environment, or the deal won’t work in the end. The growth of a business is affected by toxic work environments. This may be a red flag and a reason to say no to the deal, as it may not fit in with your requirements for your company.
One of the best ways of building your business quicker is to acquire someone else’s. Acquisition can be a painstaking task, as it requires due diligence and research to understand the target’s company and their idea for success, however expanding your business through acquisitions can be rewarding for your company growth.
In this article, we have shared some strategic tips for acquisitions and business exit covering all the significant aspects of due diligence. Regardless of the acquisition requirements, there is a vision for finding the right buyer & price for the business.
If you are just about to start the first chapter of your success story as a new startup or small business, then the next article on 409A valuation may help you.
The 409A valuation is an essential valuation report according to the internal revenue system (IRS) guidelines, and as a startup, these reports will help you get the best value for your company. Check out the detailed guide to 409A valuation in our next article.