Posted on: October 25th, 2018
Deals abound, but good deals don’t grow on trees. There is never a shortage of buyers or sellers in the middle market, but it takes a keen eye and a disciplined approach to make a good deal.
A good deal is one where a buyer has purchased a high quality company with growth potential at a fair price. Just because you can buy a company and a lender will finance it does not it a good deal.
The relevant question is not can the deal be done, but is it a deal worth doing. Is it a company with good management, does it have a solid growth profile, is it a company the buyer understands well? These are the more important questions a buyer must pose to vet the quality level of the business.
Throughout our 25 years of middle market deal doing, we’ve seen a number of consistent patterns emerge. Quality companies have all of the text book elements such as great products, great customers and great service.
But the single most important thing in discerning quality is the management and the company culture. Sustained growth emerges from the consistent application of incremental innovation through a disciplined operating model.
Only good management can catalyze this process and only a strong performance culture results in continual innovation. If you have strong management, a healthy performance culture and a disciplined operating model, you are a high quality company.
The fact is that many middle market companies lack the size or capital needed to invest in these three pieces. Throughout the deal process, if you pay close attention to the employees, the culture and how they articulate their business, you will be able to sleuth out if this company is one truly worth acquiring. Here are our top 5 telltale signs of a high quality company:
- Management is cohesive and talks a lot – Good companies have management teams that are on the same page, and all pulling in the same direction to build customer value.
- Focus on new revenue and backlog sales – good companies are forward looking and can tell you exactly where new revenue is going to come from to drive growth. They already have farmed the leads and have customers lined up to purchase.
- Focus on operational metrics – companies that measure operational performance are good companies and tend to be ahead of the pack. By holding themselves accountable, they establish internal standards that are used to energize the enterprise, making them faster, more agile and more responsive to customers and markets.
- The financial house is in order – Good companies have month end financials, reliable financial statements, and sound budgeting. They can communicate the historical ups and downs of the business in financial terms and educate you on the important variables to gauge future profitability.
- You cannot purchase the company at a low price– Good companies know their value and understand what they are worth. You will have to pay a healthy price to win the deal. If they are selling to you, it’s probably less about price and more about fit. Usually the seller and a core group of senior employees are critical to the future growth of the company. It never pays for them to feel badly about a deal if you need them to continue to drive the growth.