This question can be approached by calculating a company’s value and comparing it with one’s expectations. We tried to analyze this in more detail in our BASE Check. In our series on experienced M&A practices, I discussed the components with my colleagues Christoph Löslein and Felix Brokatzky, particularly:
- What determines the attractiveness
- The difference between product sale and company sale
- Strategic reasons for company acquisition
- Derivation and presentation of the Equity Story
How attractive is my company?
Martin: Recently, we discussed when a company is ready for a sale, something we systematically assess with our specially developed BASE Check. In addition to readiness, the other essential component is the assessment of a company’s attractiveness, which is ultimately reflected in the company’s valuation. What makes a company attractive?
Christoph: I can’t pinpoint it exactly, but let me put it this way: To measure a company’s attractiveness, I’m mainly interested in the added value the company brings, whether through product or service; is it:
- First, a significant, fitting answer to a market gap,
- or even creating a gap through disruption,
- and third, how big is this emerging opportunity, and is it growing?
Beyond that, there are many other factors, but if these first three questions are answered with honesty and enthusiasm, there’s a good chance the company is seen as attractive and actually is.
The opposite would be the infamous “better mousetrap” or a highly diversified, maybe even unfocused range of services and the inability to present the business model “crisply,” i.e., concisely and precisely.
On the other hand, there’s implementation. If the best idea doesn’t get off the ground, nothing is achieved. So far, companies can’t be run by Artificial Intelligence, and just as a superior business strategy is developed by the experience and cleverness of people, both of which unsurprisingly play a major role in a company’s transaction readiness and attractiveness.
The difference between product sale and company sale
Martin: These sound like considerations that good managers and business leaders constantly have to make. Felix, what makes these questions so special in the M&A context?
Felix: Companies, or rather their leaders, regularly practice and demonstrate how they present themselves, their products, USPs, organization, etc., to customers. But here, it’s about a different kind of presentation. The product and sales-oriented presentation are certainly important, but the conversation has a different angle and a completely different character here.
Martin: What does that mean specifically?
Felix: In sales, it’s about the product or service and its value to the customer. In a company sale, that’s just the base. Additionally, it’s about understanding how the company produces and offers its products:
- This crucially includes efficiency issues,
- internal risks, and
- whether there are adequate resources and competencies to execute the future strategy.
KPIs such as the measurement of recurring revenue, customer and employee loyalty, the management of past-related working capital—all of these illuminate performance and are reflected in the finances.
As Christoph and I have just mentioned: it’s really about the future, growth, and potential. This can be derived from the market context, competition situation, and from there the financial modeling of the future.
Strategic reasons for company acquisition
Martin: Besides the company itself, there’s the buyer’s perspective. This may not solely relate to the market and profitability. It can look quite different for different buyer groups. What are typical reasons for acquiring a company that we find?
Christoph: Of course, one looks at the profitability of the business being acquired. However, especially for strategists, there are indeed many other important factors. It begins with strategic fit, absolute size, management quality, corporate culture, and, of course, synergies.
Felix: Let me elaborate. Of interest can be:
- Access to specific customers, geographically or vertical markets, where one can then sell one’s own products,
- or access to products that can also be sold to existing customers, generating additional business.
- In a broader sense, these are also technologies, manufacturing capabilities, or patents, production capacities,
- or, in times of labor shortage, even the teams themselves.
- Last but not least, there’s the possibility of spreading administrative costs across a broader business base, which, in the tech markets we operate in, plays a minor role.
Christoph: In other words: these are themes that can extend far beyond the original markets and market potentials in development and communication, or may not be related to them at all.
Martin: High attractiveness can, I assume, then lead to a relatively high individual valuation, for example, a substantial increase in multiples?
Christoph: Correct. Multiples are set higher if other growth opportunities for the company to be sold can be shown and are sustainable. Even though some mid-sized companies may view the discounted cash flow method or using multiples of larger companies to determine their own value skeptically: attractiveness can be measured, and through the systematic capture of many components that are then integrated into these methods, the valuation becomes significantly more understandable and, in the event of doubt, easier to defend.
Martin: Does that mean that before preparing a sales prospectus, you should look at the buyer’s market first?
Felix: Absolutely, and if you want to do it well, even on an individual buyer level. At the very least, you should differentiate between different buyer groups and put yourself in their shoes: What would be their strategic angle? Which components of attractiveness are particularly relevant for which buyer? Based on this, a sales hypothesis can then be generated, and the so-called “Equity Story,” or the common thread in the sales prospectus, can be formulated.
Derivation and presentation of the Equity Story
Martin: When we bring that back to the preparation of a transaction, what does that mean for the presentation of the company and questions of attractiveness?
Christoph: The strategic interests of the various buyer groups that can be served depend essentially on the company’s strategy, organization, its offerings, implementation, and the market. That means:
- evaluating that and
- then assessing it against the background of the buyer’s market.
That’s what it’s about when evaluating attractiveness.
Martin: And how can this be presented in a structured and simple way?
Felix: For evaluating the company, we like to use the “10 Slide Pitch Deck,” which covers the previously mentioned questions under three headings:
- What does the company actually offer? Or put differently:
- What problem does it solve, or what significant market gap does it fill?
- What does the solution look like?
- What makes the company special, also known as the “Secret Sauce”?
- How does it make money, what is the business model, sale, service, financing, SaaS, etc.?
- What does the market and competitive situation look like?
- Is the market growing?
- What does the competition look like, how strong are the competitors, and what is their strategy?
- This also includes Michael Porter’s competitive intensity dimensions: threat of new entrants (imitation), substitution, bargaining power of customers and suppliers.
- How does the company implement its business idea? This includes marketing and sales, product and technology, production and supply chain, personnel strategy. And, of course, how all of this is reflected in the finances.
Christoph: Putting these points together, with an evaluation in the form of a SWOT (Strengths, Weaknesses, Opportunities & Threats Analysis) combined with potential buyer interest, leads to a truly meaningful, strategic evaluation. Depending on where the highest values are visible in a comprehensible way, the Equity Story will be based on that.
Martin: So, it’s not about how much you like the company yourself, but how it “tastes” to potential buyers?
Felix: Yes, that’s one way to put it! We have found that the basic structure of the evaluation always follows the same logic, but the design can make a huge difference in the presentation of attractiveness and, of course, in the derived valuation.
Martin: Thank you for this explanation. Next time, we’ll talk about how best to prepare and when you’re ready for a transaction.