Beauty is in the eye of the beholder in an acquisition

Business owners ask what they need to do to not only get private equity firms interested in buying their company but also how to get the big premium they see other owners receiving.

As in life, beauty is in the eye of the beholder. Many factors go into deciding how much a business is worth, but in many cases, the bigger premiums are arrived at for very specific reasons by very specific buyers. Last year, a business we were interested in partnering with received a valuation more than twice what we were willing to pay because the other buyer had already very successfully bought and sold a business in that industry, and they simply planned on doing it again. Their confidence that they could replicate their success played a big part in how they viewed this opportunity.

When acquiring a company, we focus on four key themes in arriving at a successful exit of an investment — scale, predictability, growth and profitability. There are many reasons to acquire a business, but to receive a premium, these themes are the “table stake” that buyers expect to see.

Often with scale, you get diversification, whether in geography, product or service offering. Scale also addresses a company’s ability to withstand challenges that can accelerate a small business into bankruptcy. Finally, scale addresses financing. The larger the company, the more reliable and relatively less-expensive financing options buyers have to finance the premium they’re willing to pay.

With predictability, banks and other financial institutions are more interested in lending to businesses that do well regardless of whether the economy is in recession or more ebullient times. Lenders do not receive more return on their investment when things go well, so they are focused on the downside protection that can come from predictable businesses. Predictable businesses are also important because the best way to grow is to keep your existing customers, and they generally have more “sticky” business models or a high number of repeat customers.

Growth is the third theme. The faster you grow, the more buyers are willing to consider paying for forward-looking financial performance. If your business is going to double in size over the next 12 months, selling at today’s value means you sold it for half-price a year from now. If it is growing very fast, then sellers should be rewarded for laying the foundation that drives that revenue and earnings growth.

Growth also refers to industry growth. When an industry is flat or declining, the only way to grow your business is to steal market share. Then, companies need to compete on price, or they need a new and innovative product or service. But when industries grow, then ride the wave, there should be opportunities to grow. And because there is more demand than supply, you are afforded a second or even a third chance if you make a mistake.

Finally, there is profitability. More of your hard-earned sales end up as profits and, ultimately, as distributions in the owner’s pocket. Alternatively, profits provide capital to be retained to grow the business without requiring third-party financing, allowing you to put money back into the business to drive innovation and product development.

Each industry and economic cycle is different. Oftentimes, it is difficult to determine why one firm receives a huge premium, when another very similar firm receives disappointing feedback with respect to valuation. The X factor is always the quality of the leadership team, but those same leaders understand very well these themes, and therefore, the leadership teams and the four table stakes are often found in the same place. ●

Jeffrey Kadlic is Founding Partner of Evolution Capital Partners

Jeffrey Kadlic

Founding Partner


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