What Creates Value for Buyers
- Recurring revenue with a stable, diversified customer base (ideally the largest customer represents less than 10% of sales, and the top five customers represent less than 25%).
- History of resilient financial performance through various business cycles (i.e. Great Recession COVID-19 pandemic).
- Preference for high margins.
- Leader in fragmented niche or market, ideally with further consolidation opportunities.
- Defensive market position (sustainable competitive advantage) based upon differentiation, brand reputation, etc.
- Favorable growth prospect (either organic or through acquisition) and industry trends.
- Strong management team in place, particularly if they intend to use the business as a platform.
Industries with More Favorable Trends and Economics
- Business services, particularly ones enabled by technology.
- Healthcare services.
- Technology / Software as a services (SaaS) businesses.
- Niche manufacturing.
- Consumer products
- Value-add (specialty) distribution.
Measuring Up
- Management team has worked together for a long team.
- Management represents the business in a way that showcases their competence and strength.
- Designated successors for all key roles within the organization.
- Low employee turnover across the organization.
- Track record of achieving or beating their annual budgets.
- High customer retention and customer satisfaction levels.
- Detail reporting showing performance relative to plan for strategic initiatives.
- Accounting book are consistently closed by the 7th or 15th of each month.
- Culture of making decisions by data versus opinions.
- Key performance indicator (KPI) are tracked and reported on a frequent basis (monthly or weekly).
- Significant availability of data across all functions. Some examples of what middle-market businesses should be able to quickly provide:
- Financial reports showing profitability by customer, segment, category, etc.
- Operational reports showing target Vs actual for various metrics.
- HR reports showing historical employee turnover by department.
Buyer Review Process
- What differentiates the seller’s products and services from others?
- Why do customers choose to buy from the seller relative to its competitors? Would customers miss the company if it went out of business?
- Does the company has the market power? Are they a price setter or price taker?
- Does the seller control its sales channels? Who owns the customer relationships?
- What is the seller’s cost structure relative to the rest of its market?
- Are prospects good for the next 10-15 years, providing opportunities for the next buyer?
- Do we trust management and the organization’s capacity to successfully execute and capture the expected opportunities?