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Tip: Consider Future Results When Valuing an Acquisition

Experts: You are buying the future, not past, of a company.

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When evaluating a potential acquisition candidate, buyers should look to future results and avoid focusing too much on the past. What are the likely prospects for this firm? How will it be affected by our ownership?

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While historic financials must be evaluated for accuracy and certainly play a role in valuation, keep in mind that the recession wreaked havoc on nearly every company's revenues, according to Six Keys to Successful Acquisitions. Future income streams ultimately set the value of any business.

And companies that have strong revenue streams may falter temporarily during the integration process because of different corporate cultures. Frequently after a change in ownership, a company will lose some revenue due to sales rep and customer defections and distracted staff. Don't ignore the possibility of revenue shrinkage.

Consequently, acquirers must develop financial projections as honestly and accurately as possible.

Related Resource: Benchmarks and Best Practices: The Answer Book for Growth-Minded CFOs and Controllers

To do this, Jon Skelly told MDM recently that historical data should be used to understand how a business performs through different business cycles. An acquirer should also understand potential commodity price impacts on the business, as well as the company's value proposition, competitive advantage and key risks.

While distressed sales have dominated the market over the past few years, strong companies are also being picked up by consolidators. Valuations have fallen, but the stronger distributors whose sales fell less than average and remained profitable in the recession, have still been able to demand a premium.

Related Premium Content:

Six Keys to Successful Acquisitions

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