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What are the key M&A value drivers

M&A value drivers

The M&A activity continues to be strong especially in US.Many companies want to take advantage of the current situation to sell and exit their businesses. During the M&A, the buyers need to identify the right M&A value drivers of the target company and then compare it with the target company’s competitors to identify the relative strength of the target company.Buyers tend to acquire companies that possess all the characteristics of a well run business.
As the credit markets have tightened, buyers are not looking at debt to fund their acquisitions. They are using their own capital to fund acquisitions. Hence buyers do not want to acquire companies that have a high business risk or have high outstanding debt themselves.

Identifying the right M&A value drivers

In the M&A strategy, the acquirer needs to focus on key value drivers that will increase the value of its business post acquisition.
Companies with strong value drivers carry less risk.Hence it is very important that buyers identify target companies with the following value drivers.

  • A stable and motivated management team
  • Operating systems that improve the sustainability of cash flows.
  • A solid diversified customer base
  • A growth strategy which is realistic and that can be achieved
  • Effective internal and financial controls
  • Stable and increasing cash flows

During the due diligence, acquirers would be interested whether the success or growth achieved by the target company in 1 year can be sustained over long periods of time.The acquirer is paying money to the target company for its future growth potential under their ownership. Hence acquirer needs to validate how long the target company’s value drivers have yielded positive results.
Acquirers need to focus on the elements of the target company’s business that create more cash flow, more sustainability and more future value.The acquirer needs to identify whether the target company has diversified its sales and revenues streams as well as within the products and service mix among its customer base.
In addition, acquirer needs to focus on the quality of the target financial statements and the integrity of its accounting process.The target needs to audit its financial statements regularly and should have invested in the right accounting software programs.
The target company needs to have a strong unique selling proposition.This can be high quality of its products, superior customer service or the lowest price.There needs to be a competitive advantage that makes the target company relatively superior to that of its competitors.
The target company needs to have a strong reputation in its industry in terms of expertise as this may increase the chance of business referrals which can lead to more revenues in future.

Final Takeaway

The acquirer needs to focus on the key value drivers of the target company  so that the overall value of the business increases post acquisition.Acquirers should not buy companies that have risks and then try to make it work after the acquisition.