In Acquisition Strategies, Valuations

Scott Bushkie - President, CBI, M&AMI, Fellow of the IBBAIf you’re purchasing a business, due diligence can prevent unpleasant surprises that curtail future results.

Standard due diligence includes metrics for valuation, but this is based either on historical data or future projections. Technology changes everything quickly, which makes past performance less predictable. Instead, one of the most important value determinants is the sales engine. Sales revenue is a company’s lifeblood. Yet the ability of a sales organization to drive future revenue is rarely evaluated or challenged.

If you are purchasing as sales organization, you must undertake an in-depth analysis of key sales drivers. This can help unlock significant value, or make clear that revenue projections used in valuation are unlikely to materialize.

Four key components of a sales organization should be benchmarked against best in class and carefully analyzed to assess long-term value. Those are:

  • Infrastructure
  • Support
  • Process
  • Organization

Your team should include people with the necessary expertise to comb through documents related to each. Likewise, the seller should be forthcoming with relevant documentation for each aspect of sales value.

A clear analysis may uncover several problems. Some of the most common include:

  • A sales process that is poorly documented or undefined.
  • A major project pipeline that is overstated.
  • Customer concentration in one or two clients.
  • Compensation programs that don’t incentivize the right selling behaviors.
  • No insight into future sales or measures of success.
  • Using reactive customer service instead of a proactive sales team.

Once you uncover any problems, you can assess whether these are issues a better team or organization can address. Or are they likely only to intensify when the organization changes ownership? Bear in mind that some customers or suppliers may jump ship with the change, so this must be taken into account.

The analysis should always be objective and metric-driven. It should not blindly rely on internal projections or numbers. Instead, take time to carefully analyze lead indicators such as the sales process and sales pipeline. Doing so can identify areas for improvement, offer a clearer assessment of value, and ultimately, help you determine whether this company is a worthwhile investment.

 

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