It's said in baseball that you can be a five-tool player: throw, run, field, hit, and hit with power, and that gets you a reward: a higher salary.
Likewise, in M&A there are four "tool players": add-on, add-on between $25-50 million in revenues, above-average performer, and management-in-place. These four tools get you a reward: a higher value when you sell.
Add-ons typically cover a new product, geography or customer base, and when that add-on sits in the $25-50 million sweet spot, investors pay a premium. Why? Private equity investors look for a company to fill a gap, and size matters. When you have investors seeking a very specific company size, the laws of supply and demand dictate the price.
Above-average performing companies generally carry a price premium too, regardless of size. When you then factor in a solid, consistent management team, it's not hard to see why premiums are paid for companies that feature all four attributes.
How can you qualify for an M&A reward? Planning ahead with these four categories in mind is a start.
If your total enterprise value is lower than $25 million, put a game plan in motion to grow it. If you are planning to retire, think about staying on a while to provide consistent leadership before stepping aside; alternatively, ensure you have a strong management team in place that functions well in your absence. A few smart maneuvers now can translate to millions later.
