As I’ve worked with hundreds of businesses as they look at preparing their firms for sale, I developed the acronym FEISTY. To succeed you want your firm to be:
- Financially stable
- Easy to understand
- Industry in favor
- Size is good
- Timing is right
- You can leave the business without blowing it up
This week we look at what it means to be financially stable
Buyers are risk averse and the first thing they will look for is volatility in earnings. So as a beginning, you want your firm to have been profitable for the last three years. This is such an important metric that we hesitate to go further with firms that have had a loss in the last three years unless there is a very clear reason why it was a “one off” and there is plenty of prior profitability. Nothing cools buyer desire quicker than the thought that earnings will be unstable in future.
A second thing buyers are looking for is stable and growing revenue. Revenue crowded into one year and missing from other years equals volatility which equals risk which is what buyers don’t like. Buyers also like to see revenues growing at least at the level of overall industry growth, preferably faster. So, if the industry is growing overall at 5%, having a 10% or 15% growth rate in revenue makes your firm that much more attractive.
A third element to financial stability is low customer concentration. This will vary by industry, but to start thinking about this, if a single customer is over 20% of revenues, or the top five customers over 50% of revenues, buyers will consider this a potential risk. It’s not always a showstopper, particularly if the customers have a long-term relationship with the firm, stable purchasing history, and few purchasing alternatives. But it will be the subject of due diligence, and if you can’t reduce customer concentration before a sale, you do want to be able to document why it won’t be a problem, or be willing to live with some risk reducing terms in the buyer’s offer, such as holdbacks on the purchase price contingent on customer retention.
A fourth element in financial stability, or at least the perception of financial stability, is the ability to quickly produce financial and management reporting to answer due diligence questions. Your systems should be ready to produce revenue by customer by product monthly for the last five years and have some of this detail in both the coming twelve-month budget and three-year revenue forecast.
We’ll talk further about this next week when we touch on making your company Easy to understand.