Is Your Company an A Asset?
Anyone who has founded and successfully built a business has good reason to take pride in that achievement. So if you have reached the point where it is time to sell your company, you might be forgiven for assuming it is a richer plum for investors than is actually the case. But potential buyers have no emotional investment here. They will make their own assessment to determine what your business is worth and if they consider it an A asset.
In the Eye of the Beholder
A company considered an A asset (as opposed to B or C) should get the best price, but M&A deals are based on perceptions as well as financial facts. Specific factors may matter more (or less) to a particular buyer. Furthermore, there is no clear definition of an A asset or scale in which to compare to.
Still, A assets are the types of companies that will deliver value, no matter what. There are some common characteristics of assets that are considered of higher quality that can help you understand your company's potential values. And there are ways to enhance your asset value if you do not wait until the last minute.
What We Are Seeing Now
The volume of M&A deals remains high, however, their values are more volatile than they were a year and a half ago. A assets are holding their value best. Why? Because typically the company is still performing well despite headwinds such as supply chain disruption, increasing interest rates, and the lingering threat of recession. An asset that can perform well under these conditions is more attractive.
Every industry is different, every deal is different, and marketplace changes make it even more challenging to define what makes an A asset. However, if you can remain strong from an earnings profile perspective despite volatile conditions, your company is more likely to be considered an A asset. That is if:
- You have a robust financial management team
- Financial systems are in place, with consistent reporting
- Your financial statements are sound
- You know your numbers inside and out
- You are audited
- You may have recurring revenue
- You are growing and have executed on growth opportunities
On a recent episode of The Transaction Abstract podcast, Dave Sampair from Yukon Partners goes into further detail on the subjective nature of an A asset. The Transaction Abstract podcast archives contain numerous conversations with investors, whose first-hand knowledge and insights are well worth hearing for anyone considering buying or selling a business.
What Makes Your Company a Non-A Asset?
Here are three examples where companies fall short of being an A asset:
- Company X (in the tech sector) closed a $1.1 billion deal. They had $85 million in net revenue ($75 million in recurring revenue), but $25 million in negative EBITDA. The company’s management team was professional but had been in place for less than a year, so they did not really know the company yet. The financial statements were not recorded in accordance with GAAP and several deficiencies were found during different diligence processes. Not an A asset.
- Company Y (also in the tech sector) was very profitable, with $18 million EBITDA thanks to recurring revenue. The EBITDA figure was on an adjusted basis as the Company recorded its financial statements on a billings- and cash-basis. This does not necessarily make the asset lower quality, however, customer calls revealed the company had not invested in customer support functions and was too lean. In addition, there was not a sophisticated management team which did not fetch as high of valuations as what an A asset may.
- Company Z (a traditional manufacturer) was able to sidestep supply chain issues, thanks to vendor alternatives. They had a strong customer base and sticky products. Their financial statements looked good, with ongoing revenue and grant contracts in place. They decided to sell only one part of the company, as another portion was not as profitable as desired. This was uncovered during the diligence process. In addition, the financial statements were not clean upon a deeper dive. The management team made the decision to refocus and could speak to the numbers inside and out. Although this may not be an example of an A asset, this was a very good outcome for an asset that did have flaws.
Boosting Your Asset Value
Any company could easily convert from cash-to accrual-basis accounting, to improve their perception as an A asset. Of course, you would still have to follow through to demonstrate you really are worthy of that perception. M&A and accounting advisors can help you elevate not only the appearance but the functional performance of your financials and show you why your business may or may not be considered an A asset right now and recommend changes to make your organization more attractive.
But this process is not an overnight fix. Making meaningful changes that will make your company more attractive can take more than two years. Starting now could help you earn that coveted A grade–and a bigger and better deal–sooner.
Joe Hellman, CPA
Joe Hellman is a partner leading the Transaction Advisory Services practice at Redpath and Company. He provides support to clients throughout the transaction life cycle, from evaluating opportunities pre-LOI to post-close net working capital true-ups and synergy assessments on both buy-side and sell-side transactions. Joe has experience across a variety of industries including manufacturing, healthcare, construction, consumer products, distribution, financial services, and energy. He has provided public accounting services since 2008 and joined Redpath and Company in 2020.
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