This content is for internal use by Acquira employees ONLY and should NOT be shared/copied for clients. #
Before presenting a new deal to an AE, we need to understand various add-backs, and have at least a cursory understanding of customer concentration, key man risk, revenue mix, an org chart, and a redacted employee list with start dates and positions. Any or all of these areas could represent red flags that make the deal less attractive or actually a bad one.
Also, we should definitely have MSA demographic info listed, and this is something the M&A team can and should do. As an example, it’s an easy deal-breaker if we find the business is in a very remote location.
At least identify deal killers. We don’t want to rush to LOI and have things fall apart from easily identifiable issues. Doing so creates reputational risk for Acquira. Here are some of the critical areas to review.
- WIP and backlog
- Employee Tenure
- Customer concentration, retention
- Capable management
- Addressable market
- Add-backs
- Make sense financials
- Marketing and sales strategies/approach
- Revenue / Profit Trend
- Will family ties remain in business? If so, what are the roles?
- Up to date financial statements
- Any existing / open lawsuits
- If property is leased? Terms of renewal, when, how long, how much?
Contact business owner who filled out the form or scheduled call – both the same
- Ask qualifying questions – if satisfied get them on a meeting or ask them to send over what they are comfortable sending but preferably at least 3 years financials
- Build model and get a meeting with them to gauge if they are out of their mind or not and serious about selling business using a valuation model
- If they are okay with the range of value we give and Q&A on the call we have, tell them we would like to continue talking and need more information but we are interested and on the same page.
- Prep LOI so we can deliver it IF we are satisfied and can find a buyer / AE
- Send questions to seller / request more detailed financials / etc
- If all checks out – schedule delivery of LOI meeting with them”
- We should be identifying potential AEs here, and communicating internally, but not yet presenting them with the deal until the above is all answered.
Of the above, it is ok to ask the questions on the phone and get a ballpark answer if we want to expedite (example: approx what % of your revenue is your top customer? Your 2nd biggest?).
The org chart, if they don’t have one, can literally be built on the fly by simply asking who the managers are, and how many people report to them. The redacted employee list could also be somewhat half-assed by simply asking how many employees, and how many of them were hired in the last year?
Working Capital #
Lastly, the whole idea of working capital frequently interrupts otherwise good negotiations. You need to ask about the seller’s expectations for leaving working capital in the business. If the seller expects to take all of the cash out of the business, the buyer will have to bring their own working capital to the deal. This impacts pricing on the deal.