If I were in the market to purchase a company, it would require a great deal of research and much soul searching. From a financial standpoint, careful consideration would take place. Decisions on where to invest liquid assets has as its major purpose one goal, where can I get the greatest return on investment? A bad investment can result in a huge financial setback that can take years to recover. So the question is, if I were choosing a business to purchase, what would I look for in that company? I would need to have confidence in at least three main areas.
- Quality Sales– First of all, a diversified customer base where no one customer would have more than 15% of total sales. Any customer that accounts for more than 15% of total sales is a business that is too risky. Second, I would want to see recurring and growing Recurring sales means a customer base that is loyal and comes back to the business time and time again because of their exceptional service. Growing sales indicate a product or service that is needed and will be needed in the future.
- Excellent Profit Margins and Strong Cash Flow– A company just making a profit would not be sufficient for me. A minimum of 10% net profit may get my attention, but I would really get interested when the net profit approached 15% on a consistent basis. When comparing with other companies in the same industry, I would want to see above average. Additionally, strong positive cash flow would be essential to avoid carrying heavy debt loads and providing liquidity to take advantage of quick cash decisions and building a large capital reserve.
- Excellent Managers and a Good Process– A company is only as good as its people, and the managers are the key to a strong team. Well compensated mangers with a good incentive plan in place would get my attention. They ensure that well documented processes of the business are carried out and that the company is not dependent on the current owner.
A company with an A grade in the above three areas will get the attention of buyers and be significantly ahead of the competition.