What Buyers Are Looking For

M/A activity seems to be picking up a bit, and so this is a good time to review what most buyers are looking for. I say "most" because there's always the odd scenario where someone's just looking to buy location ("We want to recruit from Austin, so let's have a firm there") or capacity ("We need more developers and acquiring an entire team that works together well seems faster"), but most buyers are looking for revenue...or they are looking for something else, and using the absence of revenue as a primary negotiating tactic. So what are the key boxes that a buyer will check your firm against? What does the checklist look like? There are six of these:
  1. EBITDA percentage. They might overlook a strict interpretation of this, but they really want 20-40% (measured against AGI/fee and not topline). Lower than that range and it's unremarkable; higher than that range and it might seem unsustainable. Keep in mind that any honest buyer is going to normalize your principal compensation to ensure that you aren't subsidizing or understating your net by paying yourself less or more than average. Our RVM algorithms do this for you.
  2. Upward year over year trends. Ideally, your results over the last three years or so should tell a good story. Flat (lack of growth) needs to be explained, and a dip really needs an explanation. Buyers are usually looking for a trend. So much so that this might be reason enough for you, the seller, to consider an acquihire to fill out that story. Remember that topline revenue trends don't matter: only gross profit and net profit.
  3. Revenue Visibility or Quality of Earnings. This becomes especially true to whatever degree the buyer isn't an insider to this industry. From inside, we know that a lot of the work is project to project, but outsiders are usually aghast at how we make that work, and so they want as much recurring revenue as possible. Or variations of that, like a contract that's auto-renewing but requires a 3-month cancellation notice. Some of you will never get there, especially if you are doing rebranding or product launches or works that's episodic by nature. But it's time to get creative and see how you can rethink client arrangements to help a buyer relax. A QofE report will look at what percentage of your revenue is recurring, client churn, cost of acquisition, longevity, and so on.
  4. Client Mix. In our work, an ideal client represents between 4-25% of your fee mix, regardless of the size of your firm. Some M/A advisors cap the upper limit at 15%, but we haven't seen any scientific evidence to support that. While buyers won't be too bothered if you have lots of clients smaller than that range, it will impact your client efficiency and show up in profit. But they will definitely get nervous if your biggest client is above that range. If/When that happens, try to account for it in terms and not price.
  5. MQL/SGL Funnel. While you may be proud that your best clients come from word of mouth, referrals, and later career stops from your best clients, a buyer will not be impressed with that. Instead, they want an ongoing system that's already in place, and preferably a slow-burning fire that they can pour some gasoline on. In other words, they want to see if your systems are scalable. They are almost certainly more interested in growth than you may have been. They will assume that you are good at selling; they will not make that assumption around lead gen.
  6. Cross-Selling Opportunities. Nearly every buyer wants to sell different things to the same clients, and so they look at how significant your clients are. The quality of your clients is more important than how highly you are connected to them. So working with a product manager at a F5000 client is better than working with the CMO at a large privately held firm, in their eyes.
So that's it. There are a lot of things they don't seem to care about, like your pricing, your sales ability, how many hours people work, your culture, awards, and the nitty gritty specifics of your staffing. If you're a long ways from considering your succession opportunities, just keep trucking along and build a firm as if you will sell it, because in doing that you'll have a firm that is really fun to run. But if you are closer to the end than the beginning, let us help with a valuation, a package that prepares your firm for sale, negotiation help for a deal in progress, or a prepended search to find the best buyer(s).

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