When it comes to mergers and acquisitions, it is common for a seller to struggle to see the transaction from a buyer’s point of view. This is quite understandable because a business owner spends years, and even decades, building their company into a successful venture. It makes it more difficult to see the transaction from a potential buyer’s perspective. Many M&A transactions fall through because the seller and buyer simply cannot get on the same page. As a seller, you can work with an experienced M&A advisor to help you manage your expectations for the value of your company so that you can not only get the most out of your deal but also make sure the deal goes through. If you’re selling a business, you should understand how the valuation of a company works, what it is based on, and what is important to a buyer.
Expected Cash Flow
A potential business buyer is going to want a complete picture of expected future cash flow. This is based on several factors, such as:
- The current cash flow and how sustainable it is
- Long and short-term capital expenditures
- Who will be taking over running the company and the cost of their salary
- Fixed asset costs and replacement costs
- Working capital and initial cash investments
The Discount Rate
The buyer’s discount rate is another key factor that sellers should understand. The discount rate is based on the level of risk of the purchase relative to other opportunities or investments. The discount rate applied to an M&A deal is usually higher than the majority of sellers expect.
For most M&A transactions, a reasonable pre-tax discount rate is generally between 20% and 30%. A riskier company may surpass a discount rate of 30%. A very stable company may have a rate that falls below 20%. Just a 10% difference can significantly impact the value of a business. Risk is based on various factors. As a seller, being informed can help you take steps to mitigate risk. Learn more about being sale ready here.
Firstly, your departure as an owner inherently creates risk. How your role will be maintained or transitioned—or who will be taking the reins—is an important part of lowering this risk factor. You can manage your key business relationships with your exit strategy in mind. If your customers and vendors are likely to jump ship when you leave, this is not going to be a good thing for a buyer. You want to have a more diverse customer base to insulate you from risks.
Second, the buyer will be concerned with your company’s exposure to micro and macro-economic factors. This means that a buyer is going to take a close look at the local economy and trends in your sector, especially if they are not particularly familiar with either one. A buyer will want to know how well your business can survive in the event of an economic downturn. As a seller, you should have a plan to address these risks in the M&A process. A professional M&A expert can help you navigate these complicated issues with ease.
Buying For Growth
A strong growth strategy is always going to be critical to a buyer when entering into an acquisition. Organic growth doesn’t usually happen easily. Investments are always going to need to be made. M&A can create growth for buyers in the following ways.
Synergy is an important element of an M&A deal because it can create a new business that is more valuable than the original company. Basically, creating a larger company can make it more efficient. Through consolidation and a solid synergistic vision, a newly formed business can reduce overhead, gain greater purchasing power, have superior access to technology and innovation, and lower the cost of debt, among other benefits.
Expanding Product Lines & Markets
Developing new products and entering new markets independent of M&A as a business owner can be expensive and take a great deal of time. There is usually the need to hire new staff, invest in research & development, and even purchase new fixed assets. While an owner is caught up in this process, the competition could be taking advantage of this opportunity to get ahead. A buyer may see the acquisition of your company as a smart way to stay ahead of their competition.
Gaining Market Share
Buyers also look at M&A as an ideal way to outpace or eliminate competitors within an industry. As previously mentioned, organic growth can be drawn out and complicated. However, a strategic acquisition can immediately cut at least one competitor out of a sector. The right acquisition can make a company bigger, stronger, and more efficient than its remaining competitors.
The Importance of Buyer Due Diligence
Due diligence is a critical assessment process in every M&A transaction that fully examines every aspect of a possible deal, informing the buyer on everything about the target company and identifying any risks that may change the structure and value of the deal.
The due diligence process takes a close look at the target company’s financial documentation and existing obligations, such as its debt, compensation agreements, employee contracts, pending litigation, leases and real estate, distribution, customer base, and warranties.
This process helps the buyer determine their expectations, understand the level of risk of the investment, and figure out how much they may be willing to pay for your company. The data gathered is a key part of shaping negotiations. A buyer conducts due diligence to protect themselves, but it is also a critical part in determining an accurate valuation of your business. This means you get what it is worth, whether it is more or less than what you anticipated. It is also a great way to test the working relationship between a buyer and seller because there is so much back and forth, and it requires a great deal of honesty and transparency, which can build trust and make a deal more likely to go through.
To Sum it Up…
As a seller, you should understand what a buyer is looking for in your company. When you know what motivates buyers, you can take measures to increase the value of your business and get more money in a sale.
If you are serious about selling, you should definitely reach out and have a chat with one of the M&A experts at Benchmark International. We have proven strategies for making deals more successful and prosperous for sellers. That’s why everyone calls us the game-changers. We would love to hear from you and start the conversation about your options for the future.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntI.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL:
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $8.25B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted thousands of owners with achieving their personal objectives and ensuring the continued growth of their businesses.