According to the book “A comprehensive guide to Mergers and Acquisitions” only 83% of mergers achieve their stated ambition. It is hardly surprising therefore that buyers attach a costly premium to any risks they find with their target purchase. Here are some red flags which will see red lines go through the original price you were hoping to achieve for your business:
Succession planning issues – if you are selling the business you are probably wanting to reduce your commitment to it. Your management team and succession plan will come under intense scrutiny. Unless you are a truly exceptional leader, succession planning shouldn’t be an issue so long as you
- promote well internally and recruit strategically;
- invest in training your successors; and
- incentivise them correctly to keep them involved in the business.
As a quick aside, as I know how critical this is I have developed a programme proven to develop top tier management or director teams.
Inflexible lease terms – inflexible lease terms will be a red flag to many investors. Not only is it a problem if they are looking to move your team into space they already have but also because if the acquisition does not deliver the expected returns (as mentioned above) an inflexible lease will be a significant long fixed-term cost.
Declining / fluctuating turnover and/or profit figures – consistency equates to reduced risk and therefore a better sale price. From the investor’s perspective a steadiness in the past increases the likelihood of predictable results in the future enabling them to plan with confidence.
High client turnover – high client turnover typically indicates a poor service, product quality or competitiveness and that is often an indicator of deeper problems within the business. Plenty of repeat business on the other hand is an indicator of likely future revenues for the buyer.
High staff turnover – if staff turnover is high it suggests a structural business problem that will damage the company’s profitability long term. Furthermore recruiting and training staff is a significant cost, while it is often months before new hires deliver a return on the investment you put into them. Together these factors will make the business less competitive.
Poor management data – buyers will perceive poor management data at best as an indication that the vendor doesn’t have a handle on their own business and at worst that they are trying to hide issues. Either way, it will hit the value of the company.
Not enough rigour – well run board meetings with standardised reporting will provide buyers with confidence the management team were on top of all possible issues.
Too much reliance on too few clients / revenue streams – if a company is too dependent on any individual sources of revenue then a buyer will price in that risk.
Feel free to contact me about MyNonExec service and find out how the 30+ company boards I advise are outperforming their markets.