As M&A specialists we are asked one question significantly more often than any other . . . ‘How much is my business worth?’ Most business owners expect us to give a definitive answer, however, the simple fact is that whilst a tentative valuation can be placed on a company, the acquirer and the manner in which it is sold largely determine its value.
Different acquirer types have varying motives for acquisition and objectives following the transaction and as such, place differing values on the company. Another variable that affects overall value received upon exit is the type of sale. A company can be sold in a number of ways and the sale method chosen can affect the overall value substantially. Detailed below are differing methods in which a company can be sold, the acquirer types each may attract and the result effect each may have on value:
A sad way of disposing of a company following years of hard work. In essence this is the sale of the hard assets of the company without placing any value on brand, customers, earnings capability or good will.
Mostly not even coming close to the true value of the company. Book value is, put simply, accountancy treatment of the company’s physical assets. It accounts for the depreciated value of physical assets with no consideration for the rate of growth, earnings power, any competitive advantages or numerous other important factors. Unless you are working on a shareholder agreement calculating a buy-out value it would not be advisable to use book value as a methodology through which to value a business as, as is stated above, many intangible factors which should affect value.
Unsolicited offers from competitors can be best described as the acquirer trying their luck. Competitors will often place low offers hoping to catch out unsuspecting company owners, believing that, without appropriate advice, the seller may bite or revert with a low counter offer.
Ungracious offers from competitors can also come in a different manner. Sometimes acquirers will enter with a reasonable offer which, once accepted and due diligence is entered, which can be exhaustive, the acquirer identifies every minute deficiency and starts to chip away at the original offer, knowing full well that the seller will face difficulties pulling out due to the financial implications with solicitors already heavily involved.
Acquirer introduced by seller’s professional advisors (Accountant, Attorney, Banker or Financial Advisor)
Business owners are often introduced to potential acquirers through a shared professional advisor. A lot of the time this introduction is initiated by a confidential disclosure of the business owner’s willingness to sell. This can obviously seem like an easy route to take as it reduces the timescales, however, this method also reduces the owners potential to achieve the best possible price for their company due to the absence of a competitive atmosphere. Without competition the acquirer can pretty much have it their own way without fear of a competitive bidding process. Additionally, the company owner cannot guarantee that their advisor would be acting in their best interests as they also have a professional relationship with the acquirer.
Financial acquirers (Private Equity Groups or Venture Capitalists)
Acquisitions made by financial acquirers will strictly be made based on numbers and more specifically, return on investment. This method of valuation removes any potential synergistic benefits, intangible or emotive factors which will add value to a potential sale. As a result multiples of EBITDA offered are generally on the lower end of the scale. Multiples offered, however, are not set in stone and will often fluctuate based on wider macro-economic factors and multiples we have seen over the past year are noticeably increasing towards pre-recession levels.
Strategic acquisitions are made with a consideration of more than just numbers. They are made with synergistic benefits in mind, and as such, acquirers may place a higher value than the company’s actual intrinsic value due to the benefits the acquisition presents resulting in high multiples often being achieved.
The ideal when it comes to the sale of a company. This method of sale focuses upon the generation of a competitive atmosphere surrounding a deal with numerous parties, ideally strategic acquirers, placing competing bids.
A truly competitive atmosphere surrounding a deal can only really be achieved by a professional M&A advisor with significant marketing capabilities and strong negotiation skills. M&A advisors are tasked with approaching potential acquirers, presenting potential synergies between the two parties and, whilst some may not actively be considering an acquisition, they are aware that the same opportunities are being presented to their own competition and, as a result, want to avoid losing ground at any cost.
From the above information it is clear that value can vary significantly depending on the parties involved and the manner of the sale. Value is completely subjective to each potential acquirer and it is the task of the M&A advisor to ensure that the parties which possess the greatest synergies are identified and a number of competing parties are brought to the table, a task which is extremely difficult to achieve in the absence of a company sale specialist. Whilst value is never a certainty, one thing that can be almost guaranteed, the greatest values are generally achieved with the aid of M&A advisors.