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If you are considering selling your company at some time in the future, the foremost question in your mind is probably: What price can I get? Much of the answer is bound up in your company’s P&L performance history and current financial condition. If it has been increasingly profitable over the years, and has a strong balance sheet, your company will be more valuable than one that has struggled. That much is obvious.
What is less well known is the impact of the kind of acquisition it is. By that, I don’t mean what formula was used to arrive at a value – often a multiple of revenue, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA) or net profit before or after taxes. Rather, it’s about whether the acquisition is put together based on financial value or strategic value. The potential difference in price can be very significant. Why? The answer is found in the relative return on investment.
Consider the following two Scenarios:
Scenario 1:
Say that Big Company A buys Small Company B and sets it up as a wholly owned subsidiary. Nothing else changes for either Buyer or Seller. In this “financial” acquisition, the entire return on investment to the buyer comes from the after-tax profit and cash flow that the seller continues to generate after the sale. Therefore, the price must be low to allow the buyer to get a reasonable return on investment.
Note that most industry “roll-ups” are structured in just this manner. What the buyer is trying to do is to acquire a number of successful local or regional companies in a particular industry on a financial basis and, then, sell or take public the larger, more diverse national powerhouse based on strategic value.
Scenario 2:
In this scenario, the seller brings valuable strategic assets to the table, such as geographical location and reach, a product line that is complementary to that of the buyer, one or more key customers, a strong position in a valuable market niche, technology and/or technology infrastructure, etc. In this new setting, both buyer and seller can generate increased revenues and earnings simply because they are together. This phenomenon used to be called “synergy” but whatever the name, the important point is that the return on investment to the buyer comes from the seller’s earnings (as before) plus the increased earnings that both now generate.
So, what can you do to take advantage of this opportunity to get a much higher price for your company? Happily, the answer is very straightforward. Take the management steps necessary to transform your company into an attractive strategic acquisition candidate. The way to do that is to find out which strategic assets are likely to have the most value in a future sale and, then, beef those up.
Future posts will discuss this topic in more detail. In the meantime, do an objective assessment of your company – both financially and in terms of its strategic profile. If you are rigorous and honest in this process, you will be well on your way to optimizing the eventual sale price for the company you have worked so hard to build.
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This article has been contributed by Steven D. Popell. Steve has been a general management consultant since 1970. Steve is a Certified Management Consultant, business valuation expert, and inventor of ExiTrak®– a process designed to assist the privately-held company owner/manager to build an attractive strategic acquisition candidate