- Companies Don't Buy Startups or Small Companies. There are 1,000 companies Apple, IBM, Google, Salesforce or Facebook could buy and all could make strategic sense. But that's not how M&A deals happen. It's when a CEO sees a strategic gap, or a SVP sees a gap in what he/she can get done in the next 12-18 months - and fills that gap with an acquisition, right or wrong. In the end, corporate M&A departments have limited time with a specific M&A strategy. Smaller companies clearly enter the radar screens when they approach $10 million in sales. Your goal is to reach $10 million in sales in a profitable manner as soon as possible through organic growth or acquiring a company. The great majority of the time, M&A deals actually happen when a CEO, president or business owner has an experienced team of advisors behind him/her working extremely hard for 6+ months to get a transaction to closing.
- EBITDA Multiples Drive Deal Prices. Many deals are valued off financial metrics and completed deal comparables. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, is the key metric for applying a multiple to derive the value of a company. Corporate M&A departments (strategic buyers) and financial buyers value deals based on EBITDA multiples depending on the company's industry, size of the market, revenue growth rate, gross profit margin, management team, recurring revenue, EBITDA, EBITDA growth rate and other factors.
- You Have to Stay On. M&A isn't a one-time cash-out, at least not anymore. Most deals have a 2-3 year retention, seller notes and potentially a 2-3 year earn-out. Assume if you get acquired, you're committing to a minimum of 24 months with the acquiring company in a specific role.
- Acquiring Companies Don't Buy Low or No-Growth Companies. A ten year old company that is growing 10% per year is of no interest to strategic buyers. A financial buyer, such as a Private Equity firm, may be interested if a strong fit, but at a depressed valuation. It is critical to fix your deficiencies and excel in all aspects of your business to optimize your value and attract buyers.
- Knowing the "Value Drivers" is Critical. The acquirer will spend a huge amount of due diligence effort to identify the sources of value (Revenues, Gross Profit, Gross Profit Margin, Recurring Revenue, Technology and other Intellectual Properties, Management and Personnel, Brand, EBITDA, EBITDA Growth) from the deal. It is essential for you to maximize these value drivers and present them to potential acquirers clearly and distinctly.
CEO Advisor, Inc. provides mergers and acquisitions advisory services and business consulting services to CEOs, presidents and business owners of small and mid-size companies. We address your specific needs with hands-on action, expertise and seasoned advice. Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.