However, you are more likely to see more dramatic differences. Many potential buyers might need to develop a capability to enter the new market first, delaying the early revenue until year two or three. Other potential buyers will take longer to ramp up the revenue as they retrain staff or undertake trails to become familiar with the product/market.
Many large corporations have an acquisition criteria of achieving a payback in the first two years of the acquisition. Thus the maximum value they are willing to pay is the gross margin achieved in the first two years of the acquisition. Any delay in scaling up revenue will severely punish the seller.
Another consideration for the buyer is the level of uncertainty associated with achieving revenue. Products which can be sold without further development and can be sold to existing customers represent a considerable reduction in risk to the buyer. The buyer will be interested in longer term revenue possibilities and this will make the acquisition more attractive, but clearly the focus of the seller should be on short term revenue at the least risk to the buyer.
Look for situations where the acquired products or services can be sold into a large established customer base or through well established distribution channels. Ideally, what you would like to see is that the buyer already has the distribution channels and the customer relationships in place to quickly sell the
products.
Alternatively, look for situations where the acquired firm has a large customer base which can quickly absorb the products of the acquirer. In some cases there are opportunities for a cross selling situation. In this situation, the buyer faces very low risks as products are already fully developed and markets already exist and are being serviced by the corporation. Early revenue, possibly well within the initial two year target is highly likely.
Most firms know where they would expand their reach if they had the capacity to do so. Thus a company selling into legal offices might expand into auditing firms. A firm selling in the eastern states might expand into the center of the country or open up markets in the western states.
While there is some market risk, the products are already well established, are not being altered and already have a reasonable chance of success in the new markets. In this scenario, there is a market risk but no product risk. Chances are that an aggressive roll out campaign could secure some new revenue within the two year target window. Longer term revenue is certainly able to be achieved in this quadrant.
Most firms know where they would enhance or develop their products to provide more functionality or features for their existing customers and hopefully secure more sales or sales at higher price points by doing so.
In this scenario, the corporation is facing some level of product risk but has no market risk. Few product developments happen without delays and cost overruns and so there is some risk, especially in time to market, for this scenario. Even so, there may be some new revenue achieved within the two year window. Longer term revenue will be achieved through this scenario.
The acquiring corporation will have a much longer planning horizon than the selling firm. The buyer will be interested in the long term possibilities of developing the products and services and opening up new markets for penetration. However, it is unlikely that this will occur within the two year window and thus it should not be expected to contribute to the sale value, however, it will make the acquisition more attractive to the buyer.
With this new insight into when revenue will be generated and what risks will be faced by the buyer, you can be much more selective in the choice of potential buyers. Those with large early revenue possibilities should be much more attractive as potential buyers.
The issue of early revenue and low risk is critical in the choice of potential buyers. However, there are still many factors to consider apart from product and market fit, there is also the consideration of how quickly the buyer can ramp up to get product out the door. Some of these issues will be addressed in a later chapter on enabling the buyer but some problems the seller cannot resolve.
Take for instance the problem of putting in place high volume manufacturing or large scale recruitment of service delivery and support personnel. There is only so much which can be done within a limited time period. If process lines need to be re-engineered, if new office accommodation needs to be sourced, if salespeople need to be retrained or specialised equipment acquired, all this takes time and delays the ramp up of revenue generation. What the seller has to do is anticipate these issues and either select potential buyers who don’t have these problems or work to find a short term solution which can be implemented while the buyer is putting in place their own capability.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
