In today’s digital business world, the rules around buying and selling businesses are changing. As the CEO of Flippa, Blake Hutchison has seen firsthand how buyer expectations and strategies are evolving. In this blog, we’ll dive into the key takeaways from Blake’s insights on how the market is shifting, what buyers are looking for, and how sellers can prepare for successful M&A (mergers and acquisitions) deals.
Over the past few years, buyer expectations have changed dramatically. Buyers are no longer just looking for rapid revenue growth. Instead, they are prioritizing businesses that show consistent cash flow and long-term profitability. This change comes as a result of higher capital costs and a shift in the way risk is viewed. Today’s buyers want businesses that can weather market fluctuations and offer predictable, sustainable growth.
Blake Hutchison explains that buyers are looking for companies that are not only growing but doing so in a way that is efficient and resilient. This new focus on profitability marks a shift from previous years, when there was a bigger emphasis on monthly recurring revenue (MRR) growth, especially during the boom years of 2021-2022.
With these evolving expectations, buyers have also adjusted their strategies. One key trend is that buyers are now including major capital expenditures in the overall value of the business. This helps mitigate risks and ensures that they are making a sound investment.
Another trend is offering founders competitive salaries to remain involved during the earn-out period, which is the time after the acquisition when the founder continues to work to ensure a smooth transition. This not only protects the buyer’s investment but also helps ensure the long-term success of the business.
Blake and other experts, like John Warrillow, also stress the importance of embracing imperfections in businesses. Rather than seeing flaws as deal-breakers, they encourage buyers to view them as opportunities to improve and grow the business after the acquisition.
The broader economic environment is also having a major effect on M&A activity. With rising interest rates and higher capital costs, businesses are now focusing more on sustainable, long-term revenue growth rather than chasing quick profits. This shift in priorities is impacting both buyers and sellers.
As Blake Hutchison points out, the cost of acquiring customers has gone up, which means that businesses must work harder to achieve a return on investment. These economic factors are reshaping the M&A landscape, with businesses needing to be more careful and strategic when considering an acquisition.
One of the major trends Blake has noticed is that buyers are increasingly focused on acquiring digital businesses rather than traditional ones. Digital businesses, such as software-as-a-service (SaaS) companies and e-commerce brands, are often evaluated using different metrics than traditional businesses. While traditional businesses might focus more on client base and market size, digital businesses are typically assessed on their revenue models, user engagement, and scalability.
Despite these differences, the overall acquisition process remains similar. However, as businesses grow, they tend to attract a more diverse group of buyers, including family offices and strategic acquirers. This diversity gives sellers more negotiation power, although it can still be difficult if there’s only one buyer interested in a business.
Earnout mechanisms are often used in M&A deals to ensure that sellers are paid based on the future performance of the business. However, these can be tricky, especially when tied to financial metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization). Blake Hutchison and John Warrillow suggest that tying earnouts to metrics such as revenue or product milestones might be a better option, as it gives both the buyer and seller more control over the process.
Blake also shares valuable insights into negotiating the terms of these deals. For example, when it comes to negotiating exclusivity periods, which prevent sellers from entertaining other offers, he advises aiming for a period of 45-60 days instead of the usual 120 days. This helps prevent sellers from being locked out of the market for too long. Similarly, due diligence periods can often be shortened to 30-45 days if buyers act efficiently.
Blake’s insights highlight the importance of understanding the current market dynamics and preparing for the negotiation process with a clear strategy. As the M&A market continues to evolve, buyers are looking for profitable, resilient businesses, and sellers need to be prepared to negotiate favourable terms.
By staying informed about these trends and employing smart negotiation tactics, sellers can improve their chances of achieving a successful and profitable exit.
In conclusion, the landscape of digital business acquisitions is shifting. Buyers are more focused on profitability and sustainability, while sellers must adapt to the changing market conditions to achieve the best deal. With strategic thinking and careful preparation, both buyers and sellers can thrive in this evolving market.
At Breaking the Mould Consulting Ltd, we specialize in helping digital business owners navigate the complexities of mergers and acquisitions. Whether you're looking to buy or sell, our expert consultants provide guidance to make informed decisions and secure a favourable outcome. Contact us today for a consultation and take the next step toward achieving your business goals.