Mergers and acquisitions (M&A) deals begin with an enormous amount of due diligence. Business leaders know that merging systems, cultures, and processes is never easy—in fact, statistics say that 70-90% of M&A deals fail—but you can improve your chance of success by measuring the right key performance indicators (KPIs) during the research process.
KPIs are metrics that measure a company's success versus a known set of targets, objectives, or industry competitors. Building a scorecard with the right KPIs gives you a clear picture of a company’s overall health and financial standing.
But which KPIs are the most important for M&A deal evaluation and can help you build a healthy deal pipeline?
Some of the most important metrics your team should be tracking throughout the diligence process can be divided into three categories:
- Revenue KPIs
- Customer KPIs
- Employee KPIs
If all three categories of KPIs are healthy, that’s a good indicator of a potentially strategic M&A deal. In this article, you will learn about the most important M&A deal evaluation metrics, and get tips to help you evaluate companies correctly according to these KPIs, including insights into leading for deal management.
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Key early-stage M&A deal evaluation metrics
Below are several M&A deal evaluation metrics, but it's important to note that the metrics you evaluate will differ depending on the industry and business model of the target company.
Revenue and sales KPIs
Sales: Sales and revenue growth should be predictable and consistent. When evaluating this metric, look at the company’s performance versus market trends. If the target company’s performance isn’t as good as (or better than) the market average, it might not make a good acquisition.
Profit: How is the company’s profitability? The gross profit margin shows how much of the company’s revenue is profit, after factoring in expenses. It is shown as a percentage, and the formula to calculate it is as follows:
(revenue – cost of goods sold) ÷ revenue * 100 = gross profit margin
Debt-to-equity (D/E) ratio: This metric is used to evaluate a company's financial leverage. It is calculated by dividing the company’s total liabilities by its shareholder equity. This KPI is important because it measures whether a company is financing its operations primarily through debt. It also shows you whether or not a company would have enough shareholder equity to cover debts if the business took a significant downturn.
Market share: What percentage of total sales does the company have in their industry? How large is the customer base? Is the company the market leader? This metric is calculated by taking the company’s sales over a given period and dividing them by the total sales in the industry in the same period.
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Lead conversion rate: What percentage of qualified leads in the sales pipeline are converting into customers? What’s the company’s win rate? Measure the number of people who take a desired action (like signing up for a lead magnet, registering for a free trial, or making a purchase) out of the total number of visitors or potential customers.
Cash flow: Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time, for things like purchasing inventory, paying workers, utility bills, paying debts, and so on. Positive cash flow indicates that a company has more money moving into it than out of it. Negative cash flow indicates that a company has more money moving out of it than into it.
Reinvestment: Is the company building for the future? Compare average gross and operating margins for the last three years to industry standards, and measure how well the company’s leadership team is managing the ratio of direct labor headcount to things like sales or indirect labor.
Valuation: Revenue and sales metrics say a lot about a company’s potential value, but valuation goes further. Financial professionals derive valuation based on projections and forecasts, in light of historical data. It also includes intangible assets like intellectual property.
Customer KPIs
Customer retention: Is the company retaining clients over time? Customer retention is a company's ability to turn new customers into repeat buyers and prevent them from switching to a competitor. When the retention rate is high, it’s a good indicator that the customer base of the company is happy. For example, as SaaS companies try to reduce churn, customer retention is one of their top goals.
Customer satisfaction: Customer satisfaction and referral rates are commonly used M&A deal metrics that act as key performance indicators for product quality and customer services. For M&A due diligence, you might be looking at KPIs like Customer Satisfaction Score (CSAT) or Net Promoter Scores (NPS).
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Customer lifetime value: What is an individual customer worth to the company, over the lifetime of the relationship? It costs less to retain existing customers than it does to acquire new ones, so increasing this metric is a fantastic way to increase the growth rate of a company.
Customer acquisition cost: Similarly, the customer acquisition cost (CAC) is the amount of money a company spends to acquire a new customer. During M&A, your investment team can use this metric to analyze the scalability of a company.
Employee KPIs
Retention of top talent: If a team’s best workers are quitting, the company may have culture issues and may not be a good acquisition. This metric measures whether the business is retaining the people it wants to keep.
Employee Net Promoter Score (eNPS): Companies use NPS to track customer satisfaction, and similar systems can be used to indicate staff engagement and loyalty. With the eNPS, the company asks employees one question: “How likely would you be to refer a friend or contact to work for us?”
Employee sales vs. cost ratio: For potential acquisitions, evaluate the ratio of revenue to employee, then compare that number with the industry average. This metric is one of the best ways to gain insight into a company’s performance and potential. A lower-than-average ratio might indicate problems like low levels of automation and overstaffed departments.
What is the best way to manage a data-driven, M&A deal pipeline?
When your most important M&A deals are supported by Affinity’s relationship intelligence platform, you’ll be able to provide your deal team with in-depth insights into every investment opportunity.
Affinity provides insight into your team’s network, business relationships, and customer interactions by analyzing data from all your emails, meetings, and interactions with prospective clients and prospects.With Affinity mobile, you can manage your deal pipeline, networking activities, and meeting preparation directly from their mobile devices
You can also pull pipeline reports that monitor the progress of your M&A deals. You’ll get valuable insight into the number of deals you’re evaluating, which stage each of them is in, and whether your deal team is tracking toward achieving its business objectives.
With built-in analytics and reporting, you have more visibility than ever into your mandate pipeline and the ability to visualize KPIs. Data visualizations that include both internal datasets and external data partner datasets, supported by relationship intelligence—insights into your team’s network, business connections, and client interactions that help you find, manage, and close more deals—mean you’ll have all the information you need to grow your business.
Talk to an Affinity sales team member today to discover how real-time, automated relationship intelligence CRM can help you track your M&A pipeline metrics.
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