You may have a comrade like my friend Dave who has a penchant for siring ideas. Lots. Dave’s ideas – products to develop, companies to create, businesses to buy – come in flurries. All are interesting Why not? or What if? musings, most are of the don’t waste your time variety, and a few are gems. In his perpetual ideation, how does/can Dave separate treasure from trash?
Dave’s latest treasure hunt is a cool case study. He is pondering buying a business, an interesting cash cow of an annuity. The business sells to a stick-beholden proposition: Regulations require customers to periodically and consistently do what Dave’s prospective company does. And, the service is not a core competence of the customers; for regulatory and practical reasons, customers outsource the service. Finally, it's a large, established, and growing market.
Dave engaged me and a mutual friend, who runs M&A for an enterprise software company, to lend a few brain cells to his evaluation. What questions should I ask, and how do I value the business? he queried. The latter’s boring (to me), an algorithmic process with a half-dozen or so methodologies to quantify value and audit historical financials; while it’s an ante, there are more important considerations. Two bread-and-butter thoughts:
- What is the need-to-have proposition (what and why do customers buy), and what are the economics? Herein I would probe to ensure it’s not a nice-to-have commodity.
- Why is the proprietor selling the business?
- Meet with a dozen or so current customers (and a half-dozen former clients) to evaluate the viability and efficacy of how, why, and how often they engage the company.
- Contact and meet with a half-dozen competitors, under the auspices of a desire to acquire their business (and, therefore, learn more about the competitive environment).
- Shadow the proprietor on a handful of sales calls.
- IBID, but go solo: Meet with a collection of prospective customers to evaluate the points in #1.
- Learn more about current regulations and regulatory forecasts, endeavoring to determine if the stick is made of mahogany or balsa.