What Are Buyers Looking for in Companies?

It has often been said that valuing a company is an art, not a science. But when buyers consider purchasing companies, there are three topics that are considered in almost a scientific way. These topics are quality of earnings, sustainability of earnings, and reliability of information.

Quality of Earnings

Some accountants and intermediaries are very aggressive when adding back one-time or non-recurring expenses. Non-recurring expenses can include complying with new governmental guidelines, paying for a major lawsuit, or even re-roofing a factory. Some have even claimed that a non-recurring expense is almost an oxymoron. Nearly every business has at least one non-recurring expense each year. If these non-recurring expenses are recorded as add backs, the earning power of the business can be inflated because extraordinary expenses have not been accounted for.

Sustainability of Earnings

Potential buyers are concerned with whether or not businesses can sustain their earnings after an acquisition. Acquirers don’t want to purchase businesses that are at the height of their earnings power; nor do they wish to purchase businesses with earnings that are inflated by extraordinary income, such as one-time contracts. Buyers must determine if the businesses that they wish to purchase have the potential to continue to grow at the same rate that they have in the past.

Reliability of Information

Sellers must always remember that the information they provide to buyers must be accurate, timely, and complete. Buyers want to use this information to make sure that there are “no skeletons in the closets.” If the information that they receive is unreliable, the potential buyer has no way of determining this. Some possible skeletons are potential litigation, environmental issues, product returns, and uncollectable receivables.

These three topics are almost always considered by buyers as they evaluate the worth of businesses. Sellers should also consider these topics so that they can receive the highest possible valuation for their businesses in the shortest amount of time.