Is the glass half full or half empty? Making an acquisition is often full of these riddles when evaluating the myriad KPIs that determine your bid price. When it’s time to dig deep into the due diligence process, make sure these five questions help shape your decisions:
- What percentage of overall sales are recurring revenues?
Recurring revenues aren’t just the future of the industry. They’re also a key ingredient in near-term success. If an acquisition target has minimal monthly recurring revenues, there is upside to take market share quickly post-acquisition with a realignment of the service mix and sales priorities. Potential upside is always a risk and therefore may drive down the bid. If the company has strong monthly recurring revenues, you can count on the consistency of cash flows during the change of control, but that stability may require a higher bid.
- What percentage of overall sales reach beyond the traditional multi-function device sale, supply and service?
This is probably the quickest way to determine if the target is culturally prepared for the office technology business of tomorrow. If they are selling like it’s 1999, changing that culture can take significant time—and time is money. If they are selling services and value and demonstrate ‘as-a-service’ thinking, then the organization may be able to take on your vision without missing a beat.
- What percentage of customers renew their agreements?
Customer satisfaction can be institutional but is more frequently personal. A company with strong renewal percentages has a culture that delivers more enterprise value.
- What is the average annual revenue growth per customer?
Similar to the general renewal percentage, annual revenue growth per customer can demonstrate a firm’s ability to make customers happy. But revenue growth per customer also shows the firm’s ability to deepen relationships beyond just renewing them.
- What is the marketing spend as a percentage of revenue?
This question is asked by Wall Street analysts of the largest companies in the world but is rarely asked in private company acquisitions. Marketing spend is a commitment to growth and often requires longer-term thinking. If a firm is consistently investing in marketing, they are committed to staying in the consideration set and top of mind in the market. If the marketing spend is de minimis compared to competitors, you may have a bigger revenue growth obstacle to overcome post-acquisition.
At LEAF, we help office technology dealers with a more comprehensive approach to maximizing the value of their enterprises and solutions that reach beyond customer financing.