Jan Fitzell, M&A advisory partner with Deloitte, sees one of the key factors in getting a deal across the line lies in getting the valuation right. He reckons that pitching an offer at the “right” level can be more of an art than a science.
“A bidder should do their homework. This means looking at what similar companies have traded for recently, and what similar quoted companies are valued at on the public markets. A business plan should be prepared, modelling out the anticipated performance over the coming years, factoring in synergy benefits as well as funding and other relevant costs. Bidders will then have to decide how much of this synergy value they may need to pay away to the seller in order to get the deal done,” says Fitzell.
“Bidders should also analyse the impact on them of not doing the deal. For example, what if a competitor was to buy the company, or what if the target continued to grow and took market share?” he asks.
Eoin O’Keeffe, managing director of Focus Capital Partners, also acknowledges that matching buyers and sellers can be tough. Buyers come to his company looking at certain vertical businesses that are complementary to their business. On the flip side, he also works with sellers, so he understands how to make the right links.
“We like to see buyers spending time to understand the business prior to any initial engagement so they have a good understanding of the business and what it does,” he says.
Ultimately you should only bid what the business is worth to you. This strategic rationale should be the driving force behind your valuation
If research has been done beforehand, then those initial conversations can be very deep and meaningful. The buyer also needs to spend time with the management team and build a relationship quickly.
“Another important aspect is if the buyer can propose ideas on how to grow the business, add value through their experience, and perhaps relieve the target business of any headaches they might have,” says O’Keeffe.
Fitzell also cautions that it is important to understand the seller’s expectations and “soft landing” them with an offer in advance.
“This can be useful in terms of avoiding a mismatch of expectations. Sometimes it’s not only price that is the motivating factor for the seller, and understanding what is really key can assist in the negotiations. For example, providing a good home for the business and its employees can often be critical for the shareholder of a privately owned business and can be as valuable to them as cash in the bank. If the seller is using an adviser, it would be normal to talk to the adviser to better understand these motivations,” says Fitzell.
The hardest part is pushing forward, and that takes commitment. At the end of day, both parties need to feel comfortable if the end result is going to be successful. If one party wants to scalp the other, then the deal is doomed, regardless of price.
“Valuation is not limited to price, of course. There are many intangibles that should be considered, including company fit, culture, people, opportunity etc,” says O’Keeffe.
“We work with family businesses and owner-managed businesses who are in a growth phase. It’s all about growth. It’s very much understanding what the seller wants out of the deal. That can call for de-risking the deal and taking a step back to appreciate the bigger picture.
“Typically, the buyer also wants the people who have run the business to stay on – and moreover be energised and excited by the transaction.
“While doing the due diligence, the buyer may see things that do not align with their culture, perhaps the contracts are too short or there is too much emphasis on clients that do not provide true ROI for the time spent.
“There should not be any surprises. That favours neither side,” says O’Keeffe.
Fitzell concludes: “However, from the buyer perspective, ultimately you should only bid what the business is worth to you. This strategic rationale should be the driving force behind your valuation. What’s fair and accurate to you will be different to what others see – they may be prepared to pay more due to the different circumstances they face, but this implies the strategic imperative of doing the deal for them is stronger.”
