Acquisitions - Mathematics and how integration plays

Owned by Eliot Muir
Last updated: Sept 23, 2021
2 min read

So a customer acquires another company or a customer is acquired. It helps to have an insight into the basic math that drives this.

Typically companies are valued either on a multiple of how much profit they generate (i.e. EBITDA) or a multiple of revenue. There might be some adjustments based on other factors - if the acquisition fits into a larger strategy - i.e. fills a gap in what the acquirer is able to offer to their customers etc.

So for instance if a company generates 1.25 million in profit on 5 million of revenue then it might be valued at say 2 times its revenue (10 million) or 8 times it’s profit (10 million).

So as an acquirer they will need to figure out how they are going to make a return on the money they spent on the acquisition - i.e. the 10 million.

If they do nothing then they have to wait 10/1.25 = 8 years until they get their money back.

But really they would like to get their money back sooner so they can do other acquisitions - or the goal maybe to create a combined entity which attracts an even higher valuation for more money.

So strategies basically are to:

  • Increase sales of the acquired entity

    • So they can use their combined sales force to cross sell to a larger customer base to increase revenue

  • Reduce costs by removing redundant costs

    • So get rid of common functions in the acquired organization and thus increase profit

Acquisitions are a massive opportunity for us to act as trusted advisors and help the management of our customers get a return on their investment.

It comes down to be able to guide them to showing how Iguana plays into a repeatable business process that means that:

  • They can implement more sales faster - i.e. we help them increase revenue

  • We can reduce the costs of implementing integration - i.e. we help them increase profit.

The value we can bring here is large - for instance if we help move the profit of the acquisition from 1.25 to 1.75 million - the valuation of that company shifts from 10 million to 14 million.