Word to the Wise: M&A: Value Is in the Eye of the Beholder … or Buyer
What’s your business worth? Unfortunately for Type A business owners, there’s not just one answer to that question.
While owners may believe that there’s a solid valuation number attached to their company, the truth is that value is fluid. It’s influenced by a variety of factors based on the benefit to a particular buyer and what that buyer can do with the company after purchase.
Types of Buyers
Generally, there are three types of buyers: strategic, financial, and related.
Strategic buyers include buyers who seek acquisition of companies with products, services, markets, and research & experimentation (R&E) that have synergies with the acquiring company’s existing products, services, markets, and R&E. Strategic buyers might include competitors, up-stream or down-stream suppliers or customers, or consolidators.
Financial buyers are often private equity (PE) firms. PE firms have various acquisition arrangements and strategies, including “bolt-ons”—companies that are in good operating condition and can easily be added to an existing platform—and PE-sponsored management buyouts. PE firms may also seek to acquire companies that they can grow by replacing the owner or management with a more aggressive team.
Related buyers include existing management, family members, or partners.
Each of these categories of buyers has different goals, which means they also have different ideas of value for the target company. For example, with a strategic buyer, if the target company expands their existing market or their product line in an especially attractive way, the buyer may be willing to pay more. A PE firm is likely more interested in buying low and selling high, hoping to optimize the company’s value by better management, capital investment, strategic expansion, and similar tactics.
Of course, value is also dependent on the benefit stream and risk associated with the purchase, which again vary according to the buyer’s goals and expectations. For example, a PE firm will have a different risk tolerance and expectation of benefit than a strategic buyer.
When you consider the buyer, the benefit stream, and the risk involved, a target company’s value is variable at any point in time.
How to Maximize Value
With the disparate needs and goals of potential buyers in mind, how can a business owner make his or her company as attractive as possible to as many buyers as possible? The key is to identify the key value drivers in the company and enhance them to improve efficiency, capability, and profitability. Here are just a few value drivers to consider:
Cash flow: This is where buyers look first. For acquisition targets, improving cash flow is the sure way to increase value.
Executive team: Strong leadership is a good indicator of a strong company.
Customer base: If a company relies too heavily on too few customers, that’s problematic. Buyers want to see a diverse customer base and an appropriate allocation of customer concentration. Product and service offering: Is the company selling things its customers want? Is growth sustainable or subject to economic or industry swings? Is the product mix right?
Supply chain: A reliable supply chain is imperative for growth and stability.
Technology: A company that lags its competitors in technology will certainly be less valuable than one that stays up to date.
Each company has its own set of value drivers. Identifying them—and fine-tuning them—is a sign that the company is vibrant, forward-looking, and ready for the future.