Characteristics buyers value most in acquisitions

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There are hundreds of buyers in the Human Capital market globally, all with their own individual perspectives on what makes an acquisition valuable. Understanding and tracking individual buyer preferences as these evolve is a continual process for M&A sector specialists like ourselves.

However there are some common denominators that the majority of buyers regard as valuable, which are often useful for owners to consider when planning an exit. Here are some of these.

1. Service and Sector specialism

Many buyers look for service and sector specialist acquisitions which will fill a distinct gap in their own coverage. Specialism also facilitates post-deal integration (due to there being low levels of overlap) and therefore reduces acquisition risk. There are still buyers for multi-service and multisector players but these are fewer in number and they often expect greater scale in any acquisition.

2. Growth plan

Buyers usually expect the remaining Management team to offer their own medium-term growth plan and initiatives, and will be put off by the prospect of an acquisition that has run out of strategic ideas and is looking to a buyer to provide these. This is why it is always important to explore a sale while there is still growth ahead of a business.

3. Succession planning

Buyers prefer to see that dilution of owners’ control is complete or at least well underway through good succession planning. The absence of succession planning often puts buyers off altogether or causes them to seek to lock in owners through retentions and earnouts.

4. Systems and methodologies

Intelligent buyers look for proof of established systems and methodologies that underpin the ‘substance’ and longevity of a business in the area of how a business manages its people, suppliers, and its clients.

5. Scale in overseas operation

Where overseas expansion has been undertaken, buyers tend to value overseas operations of critical mass (being a headcount of c.15-20 or above) and will remain cautious where these are sub-scale (unless clearly early stage and growing).

6. Attractive financial metrics

With one eye on how an acquisition will affect their own consolidated accounts and reporting KPIs, buyers will look for an acquisition to show a range of attractive financial metrics including:

  • Gross margin growth rates (historic, current, and forecast) by business division and by location
  • Remuneration and headcount efficiency KPIs
  • Gross-margin-to-EBITA-to-net cash inflow conversion rates
  • Net assets as a percentage of earnings

7. Opportunity to add immediate value

Although sensible buyers make acquisitions on a medium to long term basis, we find that many like to know tangible ways in which they can add more immediate value to an acquisition. Indeed, keeping buyers focused on these can often help sustain their appetite at difficult points in a sale process. Buyers providing assistance and infrastructure as a part of an imminent overseas expansion by the acquisition target is a good example of them adding immediate value.


We find that an appreciation of the ‘value characteristics’ perceived by buyers is useful as it enables the best possible positioning of a business to each of its potential buyers. Care however needs to be taken that this is not done on too much of an individual-buyer-bespoke basis as, in our experience, no two buyers see things in an identical way.

Knowledge of buyer ‘value characteristics’ is also important at an earlier pre-sale stage (when our exit review ValuePathTM takes place) as it assists in the identification of changes (strategic, operational or cosmetic) that could be made to a business to ensure it is most attractive to buyers in the eventual sale process.

 

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