Obviously, financial statements play a critical role in valuing businesses for mergers and acquisitions (M&As). Prospective buyers turn first to financial metrics — such as earnings before interest, taxes, depreciation and amortization (EBITDA) — when deciding how much they’re willing to offer. However, other factors, commonly referred to as key value drivers, can boost a company’s value.
Key value drivers can range from a business’s cultural compatibility with a potential buyer to significant real estate holdings to desirable intellectual property. What’s important is that a seller’s drivers complement an already compelling financial story. Let’s review three qualitative factors that can influence perceived risk and expected return — and therefore the multiples or discount rates applied in a valuation.
1. Market conditions
The company’s industry can be a value driver for some buyers, particularly if the sector is expanding rapidly. Large, established companies often prefer to buy a startup in a young, hot industry rather than attempt organic growth in an unfamiliar market. To get top dollar, the company needs to distinguish itself from its fast-growing competitors with, for example, unique intellectual property or efficient supply chains.
Most buyers also prefer a diversified customer base. A company that depends on a limited number of key customers is vulnerable to financial distress if it loses only one or two accounts. A customer base that spans multiple geographic regions or market sectors may appeal to buyers concerned about concentration risk.
2. Internal assets
Factors inside the company can also help attract buyers and add value. Examples include:
Management talent. Is the company’s management bench deep and capable of running the business successfully without its current owner? Have managers signed contracts or been offered incentives to remain after the sale? Many buyers consider key employees’ willingness to stay on critical to their offering price — and even to the deal’s viability.
Employee tenure and morale. Buyers generally prefer companies with dedicated, long-term employees over those with high turnover rates. They also evaluate labor-related risks, such as contentious union relations or frequent discrimination claims. Buyers typically favor companies with happy and committed workforces that will be reasonably easy to integrate into their own organization.
Physical appearance. Are the company’s office, service and production facilities clean and properly maintained? Are its website and social media pages up to date and easy to navigate? Are its software and hardware current, effective and secure? Solid infrastructure, formal policies and procedures and a strong “curb appeal” can be key selling points with buyers looking for a turnkey opportunity.
3. Products that pay
Some buyers focus primarily on the products and services they’ll be acquiring. Goods backed by proprietary information (such as a special manufacturing process) will appeal to most buyers because they potentially offer higher profit margins and a unique marketing story.
Strong brand recognition, growth potential and market exclusivity are also attractive. With an additional infusion of capital, a seller might be able to strengthen its brand and market position by adding products and expanding territories.
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Accurate business valuations form the foundation of successful M&A deals — guiding pricing and negotiations, supporting due diligence, and reducing the risk of post-deal disputes. Contact us to explore the full range of factors that influence value. We can help you navigate a transaction with clarity and confidence.
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