Ten Tactics to Close

Valuation Vision

By Martin Kupferman

Certainly buyers today have the upper hand. At a minimum, M&A transactions take longer, debt capital is tougher to obtain and deals are closing nearer to five times Ebitda than yesterday's seven-times multiple.

While today's environment may not weigh on the side of selling for smaller companies, it is the perfect time in the M&A cycle to position for enhanced value down the line.

The highest valuations are more likely to come from strategic buyers; generally, these are companies doing business in the same or related industries. Traditionally, these buyers pay more than financial buyers do — almost 9% higher across all industries in 2000.

However, strategic buyers look at M&A deals differently than financial buyers. They value more than earnings and cash flow.

The strategic buyer is interested in how a target company operates within its own industry, as well as its strategy and vision, brand strength and the quality and depth of its management team.

These elements are paramount in the selling process and must be addressed well in advance of selling any business. They are particularly important to those companies that fall in the small- to mid-sized business sector.

Further, business owners in this sector need to understand that multiples of cash flow or revenues applied to earnings can potentially have more influence over valuation than the earnings themselves.

To boost tomorrow's multiples today, a business owner should pay attention to a number of issues. It should:

Focus on the company's vision and strategy.

This will give the buyer a clear message that the business is well-positioned. The correct positioning for future growth can be achieved through competing in the right markets with the right products.

If the business strategy isn't on track, reworking the strategic direction and focusing on the most promising part of the company will improve the business and provide a buyer with a road map to achieving success in the acquisition.

Take a critical look at the company's position in its own market.

Part of a good plan for sale means knowing where the company stands in the metrics that apply to its industry. This means the brand is being effectively managed and owners understand how the company and its products and services are viewed by its customers.

Business owners should also understand what the competition does differently and know whether that is something that should be considered for inclusion in daily operations. Some answers can be found in publicly available industry data. Using it can help provide focus about competitive position. This should be augmented by feedback from customers, sales force and employees.

Companies in high-growth mode are often inwardly focused and do not invest the time to evaluate themselves against the competition. Moreover, they fail to take a critical look at where their industry is headed. Being well-positioned in an industry with good growth prospects will be an important boost to valuation multiple.

Develop a succession plan.

Buyers know that owners don't tarry long after they sell. Getting the company's management team in place and educating its members on how the business is run is critical. This tells buyers the business won't be a management resource drain for them.

This means objectively assessing senior managers' skills, weaknesses and areas where development is needed. An investment in key management personnel stands to improve performance and sends a strong message that their development and success is a priority. In turn, this increases the likelihood they'll remain at their posts through the uncertain times of a change of ownership.

Increasing management depth reduces risk for the buyer and makes it easier to obtain a more liquid purchase consideration. This helps a seller's representative reject or soften the buyer's push for an earnout — the bane of many a deal.

Make sure not to overlook the "soft stuff."

Culture and incompatibility are commonly cited as reasons for deals' failure to produce expected results, and today's sophisticated buyer is more likely to focus on these factors. Therefore, it is important that employees be aligned with the company's vision, strategy and culture.

In a growing business with a significant proportion of new employees, these elements can become watered down or lost. The ways to bridge the resulting gap are different for every company and are determined by the culture itself. In some companies it may be as simple as mounting an intra-office communications campaign that explains the company's purpose and ideals.

Evaluate management and financial information systems.

Skilled buyers pay a premium for companies that are on top of the real-time numbers of their business. Evaluating operating systems carefully can mean the difference between making and breaking a deal.

This starts with a set of clean financial statements audited by a credible accounting firm and having a budgeting system in place with targets that are both credible and achievable.

Take care of skeletons before they scare away buyers.

Are there any disputes about your intellectual property? Problems with your ownership structure? Threatened or pending lawsuits? These situations must be resolved before they kill the deal.

Trace the predictable audit trail that buyers will follow and review board minutes, stock books, litigation history, stock option plans and employee benefit plans far in advance of the sale.

Look for attractive ways to scale up.

All else being equal, it is a fact that buyers pay more for size. For the same amount of work, a larger acquiree provides an acquirer a more diversified, less risky revenue stream.

If you see any easily digestible acquisitions, attractive partnerships or license opportunities on the horizon, now is the time to take action.

For permission to reprint or post this article on your Web site, please contact Accord Capital Partners:

Home | Credentials | Case Histories
Good Reading | Events & Links
Services | FAQs | Contact Us