A Good Business Is Not Automatically a Sale-Ready Business
A business can be profitable, respected within its industry and provide an excellent income for its owners while still presenting challenges to an acquirer.
One of the first things a buyer will consider is whether the performance of the business can continue after ownership changes.
If the owner controls most key customer relationships, makes every important decision, manages senior staff and remains central to day-to-day operations, a purchaser needs to assess what happens when that person leaves.
The stronger the business is independently of its owner, the easier it generally becomes for an acquirer to understand what they are actually buying.
Start With the Quality of the Earnings
EBITDA is often discussed in M&A, but the headline number is only part of the story.
An acquirer will want to establish the level of earnings that can reasonably be maintained under new ownership. That means looking closely at the financial accounts and identifying owner-related expenses, one-off items, unusual income or costs, and adjustments that may have affected reported profitability.
More importantly, buyers will look at the quality of those earnings.
They may consider:
- How consistent revenue and margins have been over several years.
- Whether revenue is recurring, contracted or largely transactional.
- The level of customer concentration.
- Whether margins are sustainable.
- The amount of working capital required to operate the business.
- The level of ongoing capital expenditure.
- Whether recent growth is sustainable.
Two businesses reporting the same EBITDA can therefore present very different risk profiles to an acquirer.
M&A readiness is not about making a business look better for a buyer. It is about understanding the business as a buyer will see it and addressing the issues that may affect value or transaction certainty.
Can the Business Operate Without You?
Owner dependence is one of the most common issues in privately owned businesses.
It is also understandable. The skills, relationships and entrepreneurial drive of the founder may be exactly what allowed the company to grow in the first place.
In my experience, one of the harder transitions for business owners is letting go of the processes and major decisions that helped them build the business. There can be a genuine fear that if responsibility is handed to someone else, standards will slip or important decisions will not be made in the same way.
The result is that owners can hold onto too much of the business for too long. Key staff may be capable of taking on greater responsibility, but unless they are properly trained, trusted and given the opportunity to make decisions, the business continues to revolve around the owner.
That dependence becomes particularly visible during an M&A process. An acquirer wants confidence that the business can continue to operate, serve customers and make decisions after the current owner steps away.
As the business develops, value increasingly comes from transferring knowledge and responsibility into the organisation.
A capable management team, clear accountability and people who can maintain important customer and supplier relationships all help demonstrate that the business can continue to perform beyond the current owner.
This does not mean creating endless process manuals that nobody uses. It means having good people, training them properly, giving them clear responsibilities and allowing them to take ownership of the decisions they are capable of making.
How Concentrated Is the Risk?
Acquirers look closely at concentration because it can have a significant impact on future earnings.
A business deriving a large proportion of its revenue from one customer may be highly profitable, but the loss of that customer could materially change the investment case.
The same principle applies to key suppliers, individual employees, licences, locations or particular products and services.
Identifying these risks early gives owners time to reduce them rather than attempting to explain them away during due diligence.
What Is the Growth Story?
Buyers are purchasing the future as much as the past.
Historical financial performance establishes credibility, but sophisticated acquirers will also want to understand where future growth could come from.
That might include geographic expansion, new products or services, additional distribution channels, greater utilisation of existing capacity, acquisitions or opportunities that the current owners have not yet pursued.
The strongest growth story is generally one that is credible and supported by evidence rather than a set of optimistic projections prepared immediately before the business goes to market.
Be Ready for Due Diligence Before Due Diligence Begins
An M&A process will place the business under scrutiny.
Financial accounts, tax records, customer agreements, employment arrangements, leases, intellectual property, licences, supplier relationships and legal obligations may all form part of the buyer's review.
Problems discovered late in a transaction can affect price, introduce additional conditions or cause a buyer to reconsider the transaction altogether.
Preparing early allows the owner and their advisers to identify gaps before a purchaser does.
Understand Who May Buy the Business
M&A is also about understanding the buyer universe.
A competitor may view the business differently from a private equity investor. A larger strategic acquirer may identify synergies that an individual purchaser cannot. An interstate or international group may value market access, customers, capability or geographic presence.
Understanding who the likely buyers are — and why the business may be strategically attractive to them — becomes an important part of positioning the company.
This is one reason transaction value and a theoretical valuation are not always the same thing. Different buyers may see different opportunities in the same business.
Preparation Creates Options
Owners sometimes think M&A preparation means committing to selling the company.
It does not.
A better-prepared business usually gives its owners more options — whether that ultimately means a full sale, partial sale, succession to management or family, bringing in an investor, making acquisitions of its own or simply continuing to operate a stronger business.
Ideally, an owner should begin asking these questions several years before an intended transaction rather than several months before it.
The question is not simply whether your business could be sold today.
The better question is whether the business, the financials, the management team and the ownership structure are ready to withstand the scrutiny of a serious acquirer — and achieve the outcome you have spent years building towards.
What’s Next?
If you are considering an exit in the next few years, the first step does not necessarily need to be putting the business on the market. Wood Associates Advisory & Consulting services can help you assess the current position of the business, identify risks and opportunities, strengthen performance and prepare for a future transaction.
When the business and its shareholders are ready to pursue a transaction, our M&A Sell-Side Advisory team can assist with preparing and positioning the company, identifying potential acquirers, managing buyer engagement and guiding the transaction through to completion.