How to Establish Value in the M&A Sale Process
If you’ve thought about selling your business you need to understand valuation. More importantly, you need to understand valuation from the perspective of a buyer. Selling a business is unlike selling any other asset. A business’ value differs from day to day, from buyer to buyer.
So how do you establish the basis to accurately value your business? You write a book.
The purpose of the Confidential Information Memorandum (the ‘CIM’ or ‘Book’) you prepare and provide to prospective buyers should never have an “asking price” for the company. Rather, the CIM needs to be carefully, professionally written with relevant market research and achievable financial projections to emphasize the future opportunity for the company. The Book’s objective is to build a great story around how you have built value around your core competency, technology, know-how or whatever it is, and get credit for the potential to continue to generate sustainable revenue growth and quality earnings well into the future, under the buyer’s leadership. Then you need to convey the reason you aren’t going to be the one to do this – your reason for selling.
Your Book should provide the reader all of the variables in the valuation equation the way you see them:
· What has been the top line driver for the business over the past three years
· What developments do you focus on to improve and adopt this driver as your industry evolves
· Provide thorough, consistent financial statements for the past three years
· Provide a narrative (MD&A) of the past three years’ financial statements including any adjustments you’ve highlighted
· Discuss your industry, who your major competitors are and what they are doing to evolve with the industry
· Demonstrate your competitive advantages and how they enable your company to take advantage of market opportunities
· Provide financial statement projections for three to five years out with a discussion tying all of the above points together and support your financial projections
If you do this right, you will get competing indications of interest in the same, probably tight, range. A tight range means you have viable prospective buyers willing to negotiate and should have at least one opportunity to push up the valuation as you proceed to a Letter of Intent. If you do this wrong you will not have a viable buyer at a valuation you would even remotely consider.
This is a highly simplified view of the M&A process, initiated by a seller. Valuation is complicated and fraught with constantly changing variables that often seem irrational. This is because the future is uncertain and confidence in successful returns on investment are a big figure in the equation. Another thing: the market is always right.
If you are a motivated seller, you need to analyze recent comparable transactions to understand the rationale behind deals and ascertain the valuation metrics pertinent to your company. Know what to expect and negotiate from a position of intelligence and strength.