As the old adage states, “a business is only worth what someone is willing to pay for it”. However the process of maximizing the value of a company for the shareholders on exit has numerous factors which can be evaluated and controlled. Let´s see some of them.
Supply & Demand
By the supply side, if there are plenty of attractive, profitable and well-managed operations on the market for disposal, prices will generally be lower as it will be a buyer’s market. On the other side, if there is a high demand but a low number of quality companies available for acquisition, this will force buyers to pay a premium.
As a vendor, therefore,timing the sale of your company to coincide with demand in your market being at its highest will help you achieve the highest value.
In buying a business, a buyer is “acquiring future”. What ultimately matters to a buyer is not what the company earned last year, it’s what the company could earn in the future under their ownership. Therefore, businesses with high potential growth rates will sell for higher multiples than their slow growth counterparts. In order to fully assess the growth potential of your business, you need to analyze it as an investor, not a seller, and spend the time compiling a detailed business plan that outlines exactly how the areas of growth can be crystallized, including specific details such as the necessary levels of CAPEX or investment.
In acquisition processes, the more risk a buyer is willing to take, the higher return will demand for the asset in question. Therefore, a buyer will offer lower multipliers for a company in which it perceives a relatively high risk; Elements that may contribute to a greater perception of risk may be a high concentration of clients, dependence on operations on few staff members, or poor financial sustainability of the company. Vendor risk mitigation strategies take time to maturity and therefore it is important to plan the sale in advance before its implementation, working with external experts to evaluate and mitigate the risks that a buyer can identify.
This element is closely related to risk, although it is often determined by external factors. If the industry in which a company operates is strongly influenced by external factors, then the future profits of the company are less secure and therefore, a buyer will seek to protect his investment by applying some discount. Examples of such situations could be, companies operating in the public sector subject to costs cuts or budget changes that often occur when new governments are elected, or companies that operate in the real estate sector or related to the construction industries which may be significantly affected by changes in the real estate market and the economic environment, or recruitment or training agencies whose income streams are heavily influenced by employment levels within the private sector. Revenues in these examples could experience ups and downs linked to economic growth curves and recessions; this external volatility of the industry will be factored into a buyer’s valuation.
Synergistic Values & Savings
A strategic buyer will often pay more for a business if they believe the combination of the two companies presents synergies for further sales, along with the opportunity for cost reductions. This might be a company that operates within your industry, but with a different revenue stream; a trade buyer that operates within different geographical regions; or a company in a different sector providing different products or services to your client base. These buyers can also pay a premium to secure a deal if they view it as a defensive move, making sure they are the successful bidder rather than risk the target company being acquired by a competitor or new entrant to the market, who could potentially threaten the growth of their existing company going forward.
As presented above, both the business valuation and the timing for selling are key factors in M&A processes to maximize value in potential negotiations. Have you thought about it?