A potential buyer of a company seeks certainty – and he does this by looking at a company's history. The so-called track record of a company largely determines its valuation.
Track record can be interpreted in many ways. But three types of track record are of above average importance when selling a company.
1. The financial track record
This is an open door. The sales price of a company becomes, such as in an earlier blog has been discussed at length, largely determined by the company's historical financial performance. This is often referred to as the so-called EBITDA profit, profit before tax and special items. Turnover is also important. Recurring (and therefore predictable) turnover in particular increases the value of your company. The potential buyer applies a multiplication factor or multiple to one or more of those numbers. For a company in one sector it may be common to pay 4 to 8 times the EBITDA over the past year, in another sector it may be 9 to 15 times.
In addition to the result of the past year, the result for the past few years (often three) is also important. If the result shows violent fluctuations, there may be an explanation for this. In jargon you can then normalize the result. This means that you correct the effect of costs and revenues that are not actually a result of business operations in the profit and loss account. An example is Covid-19, which affected the results of many companies. In the event of a correction, the EBITDAC is then taken into account: the profit before interest, tax, special items and Covid-19.
If the fluctuation in the result is the result of normal business operations, then the financial track record points to an erratic development of results – with all the consequences this entails for the valuation of the company.
2. The international track record
This topic also came up in an earlier blog by. When valuing a company, historical results are also taken into account forecasts (predictions) important. How turnover and profit develop in the future determines the payback time of his investment for a buyer. If a seller can include one or more international markets in his forecast, this will boost the valuation considerably.
Because they are so important, a potential buyer will take an extra critical look at the international forecast. He does this by scrutinizing the international track record.
A seller sometimes tries to convince a buyer with desk research into the size of a market and the potential for his product. The reasoning is then: “If I manage to make the other entrepreneur enthusiastic, he will pay for the plan.” But a buyer is not primarily an entrepreneur. He's an investor. And investors shy away from risk. The buyer may be happy to take that research with him, but he will not want to attach importance to it in the valuation. And that makes sense. There is no proven international track record.
What does a proven international track record look like? Above all, it means that the company has managed to attract a number of great companies as customers. Binding logos to you, is what it is called in jargon. If you are able to bind top companies in your industry, you are also able to expand your customer portfolio in that country.
3. The operational track record
Depending on who the interested party is, the operational track record may also be important. Most relevant is the importance of good customer reviews. A widely accepted indicator is the NPS factor or Net Promoter Score. This indicator shows how satisfied your customers are and even whether they will recommend your company to other companies.
More and more companies are also getting a rating through sites such as Trustpilot. In a sales transaction, a high score is proof that customers are satisfied (and therefore likely to stay). This is especially important in highly competitive markets.
On the other hand, a strategic buyer can boost its own satisfaction scores through an acquisition, if these are, of course, lower than those of the party to be acquired. Finally, an advantage for a strategic buyer in particular is that if he buys a company that is doing incredibly well in the sector, he will take a formidable competitor out of the market.