Mergers and acquisitions (M&A) deals involve an enormous amount of due diligence. Business leaders know that merging systems, cultures, and processes is never easy. In fact, it’s been shown that anywhere from 70-90% of M&A deals fail.
But you can improve your chance of a successful M&A deal by measuring the right key performance indicators (KPIs) during the research process.
In this article, we’ll break down some of the top M&A KPIs and share some best practices for evaluating companies and opportunities using these deal metrics. Plus, learn how the right M&A software for deal management can make it easier to track and stay on top of deal progress.
Why it’s essential to have an M&A strategy
The objective of any M&A is generally to take the best parts of two companies and consolidate them to achieve more efficient and effective results—whether that’s boosting product development or market expansion. A merger or acquisition usually isn’t the end goal, rather it’s part of an overall strategy to reach business goals.
Given the complexity of M&A deals, they can have a long, non-linear lifecycle. Which means it’s important to continuously monitor progress throughout the deal process and maximize potential value at every milestone.
An M&A strategy turns your overall business goals into an actionable plan for a successful integration. It’s a roadmap that allows deal teams to keep opportunities on track and aligned with key business objectives. It also clearly outlines the metrics that help identify potential targets and conduct due diligence, so you can make deal decisions with confidence.
Key early-stage M&A deal evaluation metrics
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.
Below are some of the most common M&A performance metrics to look at when evaluating a target company. But it's important to note that the metrics you evaluate will differ depending on the industry and business model of the target company and your own strategic objectives.
Revenue and sales KPIs
Sales: Sales and revenue growth should be predictable and consistent. When evaluating a target company’s sales, benchmark their performance against market trends. If the target company’s performance isn’t keeping pace with the market average, it might not make a good acquisition.
Profit: How is the company’s profitability and financial health? 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:
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. D/E ratio 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.
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, which can be a sign of poor financial performance.
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. Valuation can also include intangible assets like intellectual property.
Customer KPIs
Customer retention: Is the company retaining its clients over time? Customer retention rate 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 typically one of their top goals.
Customer satisfaction: Customer satisfaction and referral rates are commonly used M&A deal metrics as they give insight into 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) to make sure they have a solid customer base.
Customer lifetime value (LTV): LTV is what a customer is worth to the company, over the lifetime of the relationship. It usually 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 (CAC): Similarly, the customer acquisition cost 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
Employee retention: People are often a company’s greatest asset. If a team’s best workers are quitting, it can be a sign that a company may have culture issues and may not be a good acquisition. With company culture being closely tied to performance, employee retention helps identify if a business can retain the people it wants to keep—particularly given the challenges that come with retention when it comes to M&A.
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.
Productivity and efficiency improvements: Productivity and efficiency metrics help better understand how a company is using its resources. For example, sales productivity or length of sales cycle. With M&A and integration often impacting productivity, it’s valuable to understand if a company is actively optimizing its productivity and efficiency.
The best way to manage a data-driven M&A deal pipeline
M&A deals have a lot of moving parts, leaving deal teams responsible for managing a lot of critical information about the deals in play. The right pipeline management tools allow teams to stay on top of the right relationships and keep tabs on the metrics that matter.
Affinity’s relationship intelligence platform provides your deal team with in-depth insights into every investment opportunity. Here’s how.
- Keep an eye on key KPIs: With built-in analytics and reporting, you have more visibility than ever into your mandate pipeline and the ability to visualize KPIs. Data visualizations 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, so you’ll have all the information you need to grow your business.
- Stay on top of deal progress: Pull real-time pipeline reports that monitor the progress of your M&A deals from right within your CRM. 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.
- Optimize deal decisions with Industry Insights: Powered by generative insights and proprietary data, Affinity’s Industry Insights provides teams with a better understanding of the competitive landscape to help you save time on research and make better deal decisions.
- Enrich organizational data: Affinity makes it easier to evaluate and qualify deals by enriching your CRM with robust organizational data, including funding, growth, and firmographic insights so you can make data-driven deal decisions every step of the way.
- Make the most of your team’s network: 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. Surface paths of warm introduction to target companies that help you close deals up to 25% faster.
- Manage M&A deals on the go: With Affinity mobile, you can manage your deal pipeline, networking activities, and meeting preparation directly from your iPhone.
Discover how Affinity’s real-time, automated relationship intelligence CRM can help you track your M&A pipeline metrics. Learn more and book a demo with the Affinity team today.
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Merger and acquisitions KPIs FAQs
How do you measure M&A success?
M&A success can be measured in many different ways and often depends on the strategic objectives of every deal. M&A activities and deals can be complex, but as a general rule, the goal is to increase the key metrics and KPIs that drive a return on investment. For example, a company may acquire another firm or merge with a competitor to create synergies by generating more revenue, acquiring more customers, or becoming more productive than they would have before the M&A.
How do you evaluate an M&A opportunity?
The best way to evaluate an M&A opportunity is to review the relevant KPIs based on your business objectives. There are a wide range of metrics that can be used to understand the financial health and potential performance of opportunities in your M&A pipeline. Common metrics that dealmakers will review when identifying and qualifying potential opportunities include: sales, profit, valuation, ROI, and even employee retention.
What are the key measurement indicators of post-merger success?
There are many key measurement indicators, but they typically fall into one of three categories: revenue, customer, or employees. Common KPIs to look at post-integration include:
- Financial performance
- Market share
- Customer satisfaction and retention
- Employee satisfaction and retention
- Operational productivity and efficiency
It’s common to compare these metrics with pre-merger benchmarks to determine if the integration has generated the expected value.
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