Can the Business Actually Run Without You?
Owner reliance is one of the first things I look at because it has a direct bearing on transferability.
If a buyer is approaching an acquisition with an investor's lens, they are generally not buying the business because they want to come in and perform the owner's role themselves. They want to own the business from above, have a capable management structure underneath them and allow the operation to continue without their constant involvement.
This is particularly relevant in the NDIS space. We see buyers who are prepared to invest capital into a business and support its future growth, but they are not necessarily looking to work inside that business every day.
If the seller is still responsible for the major decisions, important participant or customer relationships, staff management and problem solving, the buyer needs to ask what happens when that owner leaves.
The issue is not whether the owner is good at what they do. The issue is whether the business can continue doing it without them.
Removing the Owner Does Not Automatically Remove the Risk
There is another issue I see which owners can sometimes overlook.
An owner might recognise that the business relies too heavily on them and begin transferring customer relationships and responsibility to a senior manager. That is generally a positive step, but it can create another problem if everything is transferred to just one person.
If one manager becomes the person who holds all the important customer relationships, understands the staff, carries the operational knowledge and effectively keeps the business together, you have not necessarily removed the key-person risk. You may have simply moved it from the owner to the manager.
That matters during an acquisition because the manager can suddenly become critical to the value and continuity of the business.
If that person leaves, what happens to the customers? What happens to the staff? What knowledge walks out with them?
It can also change that manager's negotiating position because they understand how important they are to the transaction and to the business after settlement.
Good managers are absolutely an asset. The objective is not to reduce their importance. It is to make sure the business is not dependent on any one person to the point where their departure creates a material risk.
Spread the Relationships Across the Business
This is why I encourage owners to think beyond simply delegating tasks.
Customers should ideally have relationships with more than one person within the organisation. The same applies to staff, suppliers and other important stakeholders.
If a major customer only ever deals with the owner, there is obvious owner reliance. But if that customer only ever deals with one manager, the concentration risk still exists.
A more transferable business has relationships embedded across the organisation. There are multiple people who understand the customer, multiple people who understand how the business operates and enough depth in the team that the departure of one individual does not destabilise the company.
From a buyer's perspective, that creates confidence that the goodwill they are paying for actually belongs to the business rather than to one individual.
Strategic Buyers Are Looking for Synergies
Strategic buyers also look at acquisitions differently because they are often asking what the target business can add to something they already own.
That is where synergies become important.
A buyer may be interested because the acquisition gives them:
- access to a new geographic market;
- an established customer or participant base;
- additional staff and management capability;
- complementary products or services;
- greater scale and market presence;
- access to skills or capability that would take time to build internally;
- opportunities to cross-sell services;
- greater utilisation of existing infrastructure; or
- the ability to spread central management and overhead costs across a larger operation.
This is why a strategic buyer may look at the same business differently from another purchaser.
They are not only asking, "What does this business earn today?" They are also asking, "What can this business become when we combine it with what we already have?"
Growth and Bolt-On Buyers Have Different Buyer Criteria
Some buyers are looking specifically for growth through bolt-on acquisitions.
They may already have an established platform, management team and infrastructure and want to acquire additional businesses rather than build every new location, service line or customer base organically.
Their buyer criteria can therefore be different.
They may see value in the target's customers, geographic presence, staff, capability or services because those assets can be integrated into a larger organisation.
A bolt-on buyer may also be able to solve certain issues that would be more difficult for an individual purchaser. They may already have finance, marketing, human resources, technology or senior management functions that can support the acquired business.
But that does not mean owner reliance stops mattering.
If the revenue disappears when the owner leaves, or important relationships are tied to one person, the buyer still has to price and manage that risk.
Buyers Will Invest in Growth, but They Do Not Want to Rebuild the Business
Buyers may be prepared to put additional money into an acquisition after settlement.
They might invest in technology, systems, recruitment, marketing, new services, additional locations or other initiatives that can accelerate growth.
What they generally do not want is to discover that the operating structure itself needs to be rebuilt because everything previously depended on the owner.
There is an important difference between buying a business with opportunities for improvement and buying a business where the buyer has to replace the person who made the whole organisation work.
The first can be an opportunity. The second is a risk.
Growth Needs to Make Sense to the Buyer
Growth is another important part of the acquisition story.
A strategic buyer is usually thinking beyond the historical results. They want to understand where the next stage of growth can come from and whether they are in a position to accelerate it.
That may be through new locations, additional services, better utilisation of the existing team, investment in systems, greater sales capability or further acquisitions.
The strongest growth opportunities are those that are credible and connected to what the business already does well.
A buyer will place far more confidence in an opportunity that can be clearly explained and supported than in an optimistic forecast prepared simply because the business is going to market.
The Work Needs to Start 12 to 24 Months Before the Sale
The biggest issue I continue to see is that sellers start doing this work too late.
An owner decides they want to sell and only then begins trying to remove themselves from the business, train senior staff and transfer important relationships.
In most cases, that cannot be done properly in a few months.
If you are considering an M&A transaction, I believe much of this work should start at least 12 to 24 months before you intend to go to market.
That gives you time to gradually step back from major decisions, train people properly, introduce customers to other members of the team and give management an opportunity to demonstrate that the business can perform without you.
It also gives you time to identify where you may have created another dependency.
If one manager suddenly holds all the important relationships, you have enough time to broaden those relationships across the organisation rather than discovering the problem during due diligence.
What Strategic Buyers Really Want to See
Every buyer and every acquisition will be different, but the underlying buyer criteria are often remarkably consistent.
Strategic buyers generally want to see:
- a business that can operate without constant owner involvement;
- a capable management structure;
- customers and relationships that are transferable;
- limited dependence on any one employee or manager;
- staff who understand their roles and responsibilities;
- sustainable earnings;
- a credible pathway for future growth;
- risks that have been identified and managed; and
- clear synergies or strategic reasons for making the acquisition.
The buyer is ultimately trying to understand what will remain once the current owner is no longer there.
The better the business can answer that question, the stronger its position is likely to be when serious buyers begin looking at it.
Preparation Changes the Conversation With Buyers
Sellers often focus on what they want the business to be worth.
Buyers are looking at something slightly different. They are looking at the earnings, the risks, the people, the growth opportunities and what the acquisition can contribute to their broader strategy.
If an owner has spent the previous 12 to 24 months reducing reliance on themselves, building management depth, spreading customer relationships and strengthening the organisation, the conversation with a buyer can be very different.
Instead of asking how the business will cope when the owner leaves, the buyer can focus more of their attention on growth, integration and the synergies they believe they can create.
To me, that is one of the real objectives of preparing a business for M&A.
What’s Next?
If you are considering an acquisition or exit in the next few years, Wood Associates Advisory & Consulting services can help assess owner reliance, key-person risk, management structure, business performance and the areas that may need to be strengthened before going to market.
When the business is ready to pursue a transaction, our M&A Sell-Side Advisory team can assist with positioning the company, identifying strategic and financial buyers, communicating the acquisition opportunity and managing the transaction through to completion.