Doing a “roll-up”, or driving growth through acquisitions, is an excellent way to quickly increase the value of your company. When you can buy a company for 3-4 times EBITDA (earnings before interest taxes depreciation and amortization) and integrate it into your business, the same dollar of profit can be worth 5-6 times EBITDA or more. This is a smart way to grow the value of your equity, provided you do your homework on the acquisitions and you retain the customers and business you’re acquiring. <span 1.6em;"="">To that end,
Be sure you do your homework:
Personally conduct customer survey calls or engage a firm to do those calls to understand the company/customer relationship and learn if the customers intend to keep buying at or above current levels.
Review contracts and make sure there are assignability provisions, as well as confirming there aren’t cancellation or change-in-control provisions.
Look for signs of both good & bad HR practices: What is the employee turnover rate? Has your target company lost key employees in the last year? Has the company changed compensation plans recently and do new plans hinder or encourage employee performance? Has the company lost business to a competitor? Are margins expanding or shrinking? If you find negative trends, dig into the trends and make sure you really understand what’s happening.
Is there customer concentration? Know that customer concentration risk is real. We’ve had clients with excellent customer relationships who still lose a key account through no fault of their own. Handle customer concentration carefully and make sure to the best of your ability you can keep that relationship going forward.
Is there concentration with a supplier whereby if they increased their prices, you could find another supplier or raise your prices to your customers? Or do you have suppliers already that allow for better pricing than what you’ll acquire in the target company?
We give our buy-side clients a detailed, 7-page diligence checklist that’s loaded with questions to uncover skeletons. If you’d like help finding or vetting good acquisition candidates, give us a call or click here for more information.
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Question: How would you handle a transaction where you uncovered a minor skeleton halfway through the diligence process? Press on? Walk away?