Company valuation: How can an M&A advisor impact it?

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Entrepreneurs are often reluctant to engage an M&A advisor for the company valuation when they want to sell it.

Many business owners have the misconception that the most difficult part of the process is contacting potential investors when it is the least valuable. There are other critical factors such as accompaniment and company valuation.  

The company valuation process requires the time, knowledge and experience of de m&a advisor

When a business owner actively negotiates with a buyer (often in response to an unsolicited offer from a single buyer), the business owner believes the difficult part of the process is over. The most difficult parts of the M&A process are starting: Due diligence and purchase agreement writing. These final steps are where a savvy and experienced buyer can systemically whittle away at the proposed company valuation, lowering seller's proceeds by one seemingly small step at a time.  

Defusing problems and fending off attempts to renegotiate deals are where advisor earn their fees. Also important is the creation of the list of buyers and the preparation of materials, meetings and so on. But without a doubt, the most valuable part of an advisor´s work is making sure the final transaction is what the seller considers a successful outcome.

Does an advisor have a special ability to impact the company valuation ? 

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A mistake some business owners make is to expect an advisor to work some sort of M&A voodoo and get a buyer to magically increase an offer. Since most buyers are sophisticated, they will reject an overture to negotiate against themselves.  

advisor do not have magic words that they whisper in the ears of buyers to get them to increase their bids. Instead, valuation is the intersection of competition, the strength of the underlying business, honesty, the needs and wants of the buyer, the motivation of the seller, the tenor of the times, and an advisor´s ability to run an orderly process that "clears the market" by generating multiple offers. Let's take a look at each of these factors.


1. Competition from an Orderly Process

 Running an order process means the advisor will create competition. Competition breeds options and, Running in the hands of a capable advisor, can be a boon to valuation. Only after a suitable amount of competition has been created can an advisor´s negotiating skills be fully leveraged to maintain and maximize valuation Absent options born from competition, the ability to negotiate will be severely limited. 

A seller who negotiates with only one buyer (or a very limited number of buyers) runs the risk of leaving money on the table. Would other buyers be willing to offer more? A seller will never know unless multiple offers are received. In an M&A process, all suitable buyers will be contacted, appropriate information will be provided at the right time, and interested parties will submit offers. This "clearing of the market" provides the seller with a full range of options.  

Running an orderly process is helped if the advisor has a deal team. A single advisor (not a team of advisors) who must do everything might be taking on too much responsibility to do an effective and efficient job for the client. The responsibilities of the team members include:  

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  • Materials preparation the information necessary to create a CIM, writing the CIM, spreading the financials and creating financial models, conducting market research, creating a buyers list, gathering due diligence materials, maintaining an online data room.  
  • Deal execution disseminating information, obtaining confidentiality agreements, soliciting - offers, setting up meetings, handling follow-up questions and requests. 
  • Negotiation – crafting a deal that makes sense for the seller, fending off attempts to lower the valuation and/or change terms, making sure the deal closes.  

A capable advisor should be able to explain which team member will handle which tasks. A deal team for Middle-Market transactions should have two to four members, however for larger and more complex deals, a larger team might be required.


2. Strength of the Underlying

Business Simply put, a company with growing revenues, a strong bottom line, no customer concentrations, and a strong management team will be more desirable than a money-losing company. If the fundamentals are sound, the seller can expect a good valuation. But just because the original offer is strong does not mean the seller will get to the finish line with that original valuation intact. Having multiple options means a seller has a far better chance of maintaining the valuation in the strong offer.  

3. Honesty 

One sure way to scuttle a chance to put together a deal is to mislead and misrepresent. Lack of honesty will very quickly ruin a seller's credibility, thus tarnishing valuation and perhaps making a deal virtually impossible to close. 

4. The Needs and Wants of the Buyer  

 A buyer who wants a particular company more than al others will be more likely to pay a higher price. The best way to find that buyer is by clearing the market, as discussed above.  

5. Seller Motivation  

The inverse of buyer needs and wants is the seller's motivation to pursue a transaction. If a seller has few options and is desperate to do a deal – any deal! - that desperation will drive down valuation. A seller at the helm of a financially sound company with multiple offers in hand will be in a much stronger negotiating position.


6. Tenor of the Times 

 We are currently experiencing a rather frothy M&A market. Demand from buyers far exceeds the supply of companies coming to market and that is driving up valuations.  

Today's low-interest rates mean a business owner has a difficult time replacing income from his company with income from fixed investments. This reduces sellers and puts further upward pressure on valuations.

7. Skill of the advisor

The greatest value that advisors give to a client is in the last days before closing. A strong valuation is not the result of an advisor´s “magic words." Instead, it is the confluence of a multitude of occurrences, all orchestrated by the hands of knowledgeable and experienced advisors. Magical valuations can be had, but they are not the result of magic, they are the result of skill, foresight, planning, experience, and execution 

The M&A Professionals



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