Don’t be surprised by your acquisition’s future revenue (or lack thereof)

Past revenue performance is not always indicative of future company income.  How can you ensure that you acquisition will be a revenue performer?

You may have many different revenue-related growth goals for your acquisition: 

  • Expansion into new product areas 
  • Expansion into new geographies 
  • Access to new types of customers 
  • Diversification of your business holdings 

A focused investigation into your target’s revenue approach will go a long way to helping you achieve these goals and avoid unexpected drags on your profitability.

The target company you are looking to buy has likely made rosy predictions of their future revenue. How can you validate your target’s ability to drive revenue? How do you plan for revenue downside and maximize the returns on your purchase?  How do you know that the company’s revenue predictions are relevant to your business model?  I have seen dozens of troubled purchases where examination of a target company’s revenue approach allowed deal structuring for success.  So what are the right questions to ask?  What are the important investigations to understand the quality of your target’s revenue? 

Ask the right questions up front 

Understand where revenue has historically come from, so you can assess the future perspective.  Has there been a consistent and predictable flow of revenue by customer, product and channel?  Has customer or market churn been a problem?  Are there single sources of large pieces of revenue, like big customers or regions, that require special protection. 

You must understand the customer/company relationship in detail to understand the security of future revenue streams and current weaknesses.  Does revenue come from subscriptions or one-time purchases?  Have customers signed long-term contracts?  Are the contracts valid through a change in ownership?  How does the company measure customer satisfaction?  Does the company have long-term customer relationships?  How does the company nurture customer relationships through people, processes and systems? 

Pricing and discounting can play an outsized role in future revenue.  Does the company have an effective approach for setting price and products and services that reflect their value?  Does the company have a consistent discounting policy, and discount controls in place during sales that support profitability?     

Be firm, but strategic about asking for supporting company data

Start with management reports that address future revenue potential.  How does the company manage its current revenue picture?  Does executive revenue management and reporting inspire confidence? How does it compare to your revenue management standards? 

Verify customer relationship details.  Review customer agreements.  Ask for customer surveys and market data that is used for customer management and planning.  If you are concerned about losing big accounts, make customer retention or satisfaction a condition of closing the deal.  My experience in many diligence projects is that buyers underestimate the importance of understanding the importance of customer relationships, leading to surprises and lost business down the road. 

Finally, data crunching on primary data sets can shed revenue insight, but limit your analysis to specific concerns that you have raised with the company. Companies are often reluctant to share detailed data sets until after a deal is signed.  Show your target company why the data requested is vital to your acquisition model and to support the negotiated purchase price.  If management reporting is insufficient you may have to obtain record-level data from finance, CRM, product and marketing systems to resolve identified deal issues. 

Reflect revenue weaknesses in your deal terms

Having a clear vision of the health of a target’s revenue is powerful to support a strong deal model.  Finding significant weaknesses in a company’s revenue is not necessarily a deal-breaker.  I remember a project where we discovered that a target company had many customers that current customers might object to, potentially causing the loss of current customers.  The purchase terms were revised to exclude those customers from the deal and the acquisition went through successfully.  You will need to address any target’s revenue weakness. Be sure that sale terms reflect this required investment and potential distraction.

Properly investigating your target’s revenue will help you reach terms to make your acquisition a success and help you avoid distracting surprises after the purchase. Managing your target’s revenue approach can ensure that your purchase stands the best chance to be cash positive and not a drag on your existing business.  

Charles Leinbach is an M&A and technology leader, having spent over 30 years helping companies grow through organic and M&A activities. Charles has worked for global firms such as Monitor Company, AlixPartners, C-bridge, and Hewlett Packard, and now is a Principal at Downeast Growth Consultants.  Charles has supported over 40 M&A transactions around the world over the past seven years. 

Downeast Growth Consultants is a firm that helps early-stage and mid-size companies grow to their potential through organic growth and acquisitions.  Downeast offers growth assessments, growth project implementations, acquisition diligence and post-sign acquisition services.  For more information please visit our website at www.downeastgrowth.com

Scroll to Top