When helping our clients sell their businesses, we get to witness buyer behavior first hand. The most important behavior is their economic vote how much they are willing to pay for a business. Many factors go into their assessment of value, but a contractually recurring revenue stream is consistently the number one value driver.
Why is this so important? The first answer is risk. Buying a business is risky. Any factor that reduces this risk is rewarded with transaction value. Forecasted sales, for example are at the high end of the risk scale and are heavily discounted in value. Historical time and materials revenues that are most likely to be at about the same level next year are somewhere in the middle of the risk scale and are valued accordingly.
The owner and key employees may leave after the acquisition and may take their customer relationships and accounts with them. Those customers locked into contracts are less likely to leave. The acquisition can temporarily inject uncertainty into the marketplace and cause disruption or delays in pending sales situations. The integration efforts will introduce execution risk into previously routine revenue generating activities.
The acquiring company wants the existing customers to stay put long enough to get comfortable with the new company. Contracts with plenty of time remaining are their security.
How can you use this knowledge to your advantage? Go on a mission to convert every time and materials revenue source you can to an annual contract. If you are a software company, for example, and you have customers that are not on an 18% - 20% annual maintenance contract, get those customers converted. A strategy might be a one time get current sale in return for signing an annual maintenance contract. Services companies should review their T & M records with their regular customers and devise programs that convert those to annual fixed price programs. Equipment dealers come up with your own extended warranty programs. Services firms devise a concept where you provide departmental or functional outsourcing for your clients.
On a value scale, contractually recurring revenue is a 10, expected historical revenue is a 6 and a sales pipeline is a 3. Move your 3s and 6s to 10s and recognize a big boost in your business selling price. |
Author Bio:
Dave Kauppi
David Kauppi is an M&A Advisor with Mid Market Capital, Inc. MMC is a private investment banking firm specializing in providing corporate finance and intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of mergers, acquisitions, divestitures, resolution of shareholder issues, private placements of debt and equity, valuations, corporate growth and turnarounds.
Dave began his Mergers & Acquisitions practice after a twenty-five year career with a Multi-Industry background that included banking, high tech, and services. While in the leasing industry he gained a reputation for “finding a better way” through creative deal structure. During one fiscal year, Dave’s region successfully negotiated over $200 million in financing transactions. He was instrumental in negotiating three multi-million dollar strategic partnerships in the service industry and launched and managed a very successful division.
In his M&A practice, Dave has completed transactions that range from succession planning exits, to finding strategic buyers for healthy, rapidly growing companies seeking a partner to provide scale, to division divestitures, to troubled companies. Dave has also been a speaker on shareholder issues and has published several articles on Mid Market M&A. His career focus has been in sales and sales management and he has received numerous awards for sales excellence. He brings his strong negotiating and facilitating skills to his practice, successfully managing transactions to a win-win result.
Dave graduated from The Wharton School of Business, University of Pennsylvania with a BS in Economics with a concentration in Finance. He received an MBA with a concentration in marketing from DePaul University. Dave is a Certified Business Intermediary (CBI), a licensed business broker, and a member of IBBA (International Business Brokers Association) and the MBBI (Midwest Business Brokers and Intermediaries). Contact Dave Kauppi at (630) 325-0123, email davekauppi@midmarkcap.com
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