Valuation Key to M & A

It has been a few years since the last big wave of mergers and acquisitions, but as baby boomers approach retirement, the M&A arena likely will heat up again. Valuation services are essential for both buyers and sellers in the M&A process, and valuation experts are critical to the success of a buyer’s or seller’s advisory team.

On the Selling Side

Business owners – particularly those who founded the business – often have an unrealistic idea of the company’s value to a buyer. Sometimes it’s just false hope or an inflated ego that clouds the owner’s vision. More often, however, owners have a number in their head that they believe the company is worth, but can’t support that number with data.

For this reason, it’s a good idea to have a business valuation performed early in the sale process. This will give the owner a range of realistic values to pursue, based on comparable companies and multiples of EBITDA, sales, book value or other relevant data. If the range is unacceptably low to the owner, it will also give him or her time to make adjustments in the company, increase earnings or address other problems before sale.

Valuation experts also assist business owners in several other areas before and during the sale process:

Confidential Offering Memorandum: The confidential offering memorandum is a formal offer to sell the business. It presents an overview of the company and its management, historical data from audited or reviewed financial statements, and other information of interest, customized for potential buyers.

A business valuation professional plays an important role in the preparation of this document. The valuation expert is tuned into the synergies the business has with each potential buyer and can tweak the overall presentation of the company’s strengths to align them with the needs of targeted buyers.

Data Room Set-Up and Due Diligence Response: As potential buyers respond to the confidential offering memorandum, the valuation expert should be considered as the gatekeeper for the due diligence team. He or she often sets up and monitors the “data room,” or online repository of information, as it is made available to buyers.

The valuation expert also plays a role in crafting due diligence responses. His or her input can help sellers avoid problems by revealing too much, saying too little or using language in a way that may have unexpected consequences.

Purchase and Sale Agreement: The design of this legal agreement requires the input of the business valuation expert. He or she can:

• help draft wording that defines the purchase price,
• provide detail for calculations,
• give examples to illuminate the interpretation of legal terms, and
• ensure that the agreement is in conformance with the client’s accounting procedures and policies.

On the Buying Side

A valuation professional is also an integral part of the buyer’s advisory team. For example, a valuation expert has knowledge of the necessary financial information to draft the letter of intent to buy a business. He or she is also involved in determining fair market value, the synergies expected and the purchase price for the target business.

In the due diligence phase, a valuation expert can help the buyer by reviewing the initial valuation and the details of the confidential offering memorandum. Valuation professionals are also involved in drafting the purchase agreement and translating legal terms into workable examples.

When putting together an advisory team for mergers and acquisitions, choose a valuation expert who knows your business and industry. Given his or her knowledge, the business valuation expert can help ensure that you make the most of the purchase or sale.