The Top 10 Reasons or Motivations for buying your company

Posted by Chris on March 6th, 2010

Some time ago ( after I built this blog ) I came across a company called BCMS who had had a lot of experience in selling companies. I read the information on their website, downloaded various other information and ordered a copy of their excellent book  ” A refreshingly different approach to selling your business for maximum value “.

Later on I attended one of their excellent seminars. ( Very refreshing for Business Owners but a bit damning of normal accountants and lawyers !! )

In this presentation they highlighted the Top 10 reasons/motivations for company purchase ( in order of importance )

Source ( NB. worth downloading their book ” Selling your business for maximum value ” )

Recently I have been working with a number of clients who are selling their businesses or who are still building their businesses with a view to exiting and I have emphasized these reasons and motivations to them and advised them to emphasize these points in a sale and keep these points in mind as they build their  businesses:
1. Client Base ( This is a dominant factor )
The quality of the customer base and repeatable and guaranteed business from those clients is a primary factor.
2. Potential for growth ( This is another dominant factor )
The potential for growth through the existing customer base and via new customers at home and abroad is also a primary factor.
3. Globalisation/regionalisation
We live in a globally connected world. Companies from India and China are looking to acquire in the U.K. and other countries. You must consider the applicability of your company to buyers from India, China and the U.S.A. at the very least. They will buy you because they have a global strategy or because they want to get into a particular region.
4. Ability to generate cash
Cash is King !! ( We didn’t need to say that eh ?? )
5. Development of products and services
If you have processes to ensure that you are ALWAYS at the forefront of your market this carries a high value.
6. Patents and IPR
If you have protected the patents and Intellectual Property Rights of your products and services this is valuable.
7. Operational and/or Financial synergies
You look at the operational and financial synergies and the costs that may be taken out and the additional profits and value that you bring to the purchaser.
8. Skilled workforce
The effort that you have put in to training and developing your workforce now comes to the fore.
9. Profit/ROI/multiples ( LAST )
Yes, amazingly, the very thing that the average accountant ( and probably some of the interested parties Financial Directors and advisers ) will value you on turns out not to be the thing that is held in most value – in fact it is the last !!
This is true now and will be true in n years time when your purchaser comes to do the same thing.
Companies will buy for strategic reasons NOT for multiples of profit or revenue.
When considering the value of your company consider it’s value to the potential purchaser 1 -3 years AFTER they have bought you.

Investing in Companies – Prioritising the P’s !!

Posted by Chris on October 21st, 2009

We have talked about the use of the “ P “ words as an aide memoire to ensuring that a proposed investment has the right ingrediants.

The main P words that we are using are People, Proposition, Profit, Potential and Plan. After some considerable deliberation I have decided to prioritise them in this order. Let’s look at why and also add some meat to the bones of each of these points.

Certainly you could debate my ordering considerably. You could say, for example, that without the right Proposition, the right idea, nothing else matters. You could also say, especially in the light of Google, Facebook and Twitter, that Potential is more important than Profit. However I think that lots of people would agree with me that Profit is, generally speaking, more important than Potential.

I have put People at the top because I believe, and indeed I have seen, that People can make an average Proposition really work and that People can also really kill a good Proposition. In that sense People are more important than the Proposition. I think that it is also the case that a lot of business’s are similar to one another but the thing that differentiates one similar business model to another is the People that are running it. In addition, almost all Propositions will be challenged really hard during their business lifetime and it is the People that will recognise the challenge and fine tune it, rise above it, side step it, go around it or simply change the  original business model in order to succeed. This seems to me to be almost inevitable – that the original business Proposition will have to be changed in the light of experience to succeed.

If People are the most important aspect of the company that you are proposing to invest in then what are we looking for in those People ?? ( We don’t know how many People we are talking about here, or what roles they hold ). If you are talking about a number of People then it is great to see them working as a team, each with their own skills, but working together. It is also important that there is a leader. Ideally we would like to see experience. Experience of starting and growing a start-up or early stage company.

In no particular order we are looking for a number of characteristics in these People. These will include – passion, persistence, determination, professionalism, presentability, believability, likeability, honesty, loyalty and innovativeness.

The Proposition will be our second most important “ P “. Some people would say that the Proposition is the most important “ P “ but I have explained why it is not for me. The Proposition must be logical, understandable, researched, focussed and it must generally scream “ I have to buy one of those “ or “ I can see exactly why someone would have to buy one of those “. In my experience the original Proposition rarely stands the test of time fully intact. It is almost always “ not quite true in the light of experience “.

If the People and the Proposition look good then we come to the debate about Profit and Potential. We must also consider whether we are talking about Gross Profit  ( Transaction Profit ) or Net Profit ( Trading Profit ). Profit before all overheads are considered or profit after all overheads are considered.

What we know from, for example, the dotcom experience, is that companies that have relatively small transactional revenues and profits become hugely valuable when huge transaction numbers come into play. In other words if they are scalable and replicatable globally then small amounts of revenue and profit turn into massive overall revenues and then profits because of the huge numbers involved. ( Microsoft, Amazon, and eBay might be examples of this. )

Profitability ( It costs me this, I sell it for that and make a profit of whatever ) is clearly important but it might not lead to the company being as valuable as when it had huge Potential.

It is also one thing to be asking yourself whether you will achieve a highly valuable company by going for a low profit, high revenue model versus a high profit, low revenue model but entirely another to be asking whether you should go a virtually no profit ( or negative profit ), global transaction model !!! ( Google, Facebook and Twitter being examples of these ) The founders of Google could easily see how they could get millions of transactions ( well users anyway ) but not so easily how those millions of transactions would turn into revenues and profits.

Our assessment of Potential will include considering whether it is applicable globally and whether it is scalable and replicatable.

The final thing that we will look for is a Plan. A financial plan ( sales, costs, profits/losses,cashflow ) and a business plan ( How is it all going to happen ). This will be clear, simple, achievable ( at least on paper ) and concise. I put the Plan at the bottom because, inevitably, it will change !!       



Copyright © 2007 M & A Rainmaker. All rights reserved.