In Deal Note® 193, we wrote about the value of predictable revenues, and in Deal Note® 100 about how it’s critical to get potential buyers to believe in your projections. Both of these items can primarily be addressed with a key metric: backlog. The issue here is that “backlog” may mean different things to different people.
When you tell a potential buyer you have $40 million of backlog, what exactly do you mean to convey to the buyer? Is this the total of all booked orders to be shipped in the next 18 months? 2 years? Does this include potential or expected bookings? In other words, is the entire $40 million in firm orders? Is all of it under long-term agreements and blanket purchase orders with fixed prices and terms? Are the unit volumes confirmed? Are the delivery dates confirmed? Do you refer to these as “Release Dates”?
Where the backlog sits: clarity of nomenclature matters as much as size. Over the past 25 years of advising middle-market A&D business owners, the most successful strategy is for the seller to complete a deep dive into their backlog before presenting it to the market. Build the schedule yourself and share it with your M&A Banker, long before you go to market: contract by contract, funded and unfunded, firm and optional, with release dates and without. A seller who can provide a backlog with great clarity turns an often-muddled diligence activity that diminishes value into one of precision that can substantially enhance value.
Have a great day,
Max McFarland
Associate
