Which parts of a target’s revenue forecast should a buyer pay for?
An investment committee considering an acquisition should ask how much of the forecast comes from customers buying what they buy today, and how much depends on them changing their behaviour. A target may have a good record of retaining customers. That tells a buyer something about existing revenue. It tells the buyer much less about whether those customers will buy an additional service.
Find the assumption that matters to the bid
Start with the revenue increase in management’s plan. Separate growth in the underlying market from the share the target expects to win and the additional sales it expects from existing accounts. Run the forecast again with a slower take-up of the new service. If that changes what the fund would be prepared to pay, customer demand deserves a place near the top of the commercial due diligence brief.
Consider a target that expects its largest customers to buy an additional service. The person who renews the existing contract may have little say in that purchase. The more useful interview is with the person who controls the budget. What do they buy today? When did they last consider changing supplier? What would need to happen before the target could win the work?
Test the forecast with customers and industry evidence
In commercial due diligence on a national industrial services business, Zenith screened more than 200 potential interviewees and spoke with around 20 former employees, competitors and customers. A separate survey asked around 50 customers how they chose suppliers, what made switching difficult and whether they saw demand for new services. Industry and economic data helped the team assess the resilience of the market as well as the target’s position in it. Read the published research example.
Those questions bear on different parts of the valuation. A customer may face considerable cost in replacing an existing supplier and still prefer another provider for a new service. A buyer can retain the first revenue stream in its forecast while allowing more time, or a lower win rate, for the second.
Put the difference in the investment paper
Show the committee which sales the evidence supports, what changes in a slower-growth case and which assumptions management can test after acquisition. Where additional sales depend on a change the new owner must fund, identify who will make that decision and how progress will be measured. Zenith’s Implementing Strategy guide sets out how to assign that work and review it with management.
Discuss an acquisition forecast
Tell us which assumptions could change your bid and when your investment committee needs the findings.