Mergers and Acquisitions

Mergers and acquisitions (M&A) provide an opportunity for owners to expand a business’ footprint (buy-side) or transition to succession or retirement (sell-side).  Almost 60% of the disclosed 2019 M&A transactions (according to Flashwire U.S. Monthly) were under $100 million, so this is an area that small privately-owned businesses can maximize returns on their investment equity by creating deal structures that provide the greatest accelerated cash benefits to both buyers and sellers.

Obviously, all sectors are not viewed the same by buyers and sellers, so the price expectations have varied over time.  The below chart reflects the median selling price divided by earnings before interest, taxes, depreciation, and amortization (Sales/EBITDA), a measure of the relative attractiveness of a particular sector to average buyers (the individual sector names are not listed in this example since this is just to illustrate how varied and unique the multiples change over time). Overall, between 2018 and 2019, median sales multiples increased slightly, from 4.1 to 4.2 times EBITDA but the median sector EBITDA multiple for 2019 ranged between 3.4 to 9.0 times EBITDA.  From a financial performance perspective, overall median gross margins increased from 64% to 67% between 2018 and 2019.  On a sector basis, the 2019 gross margin range was between 37% and 100%.  This information provides a glance at the sector transaction data for private companies bought and sold between 2010 and 2019.  Since target companies may not fit with the median performance for a particular sector, we provide rigorous analysis to determine the appropriate pricing range for a specific target.

We provide consulting expertise to navigate buyers and sellers through the process of planning a negotiations strategy and collaborating with legal counsel to create the best path to a successful transaction.

Activities to support clients include the following (not an exhaustive list):

  • Developing the acquisition criteria and determining whether the target meets that criteria
  • Develop a search of target companies
  • Assess the targets’ weaknesses relatives to the acquirer’s strengths
  • Identify any related synergies (revenue enhancements, cost reductions, risk reduction, process improvements, etc.)
  • Develop an assessment of the qualities of the transaction for the client
  • Build cash flow models to determine the indicated face value of the business in the eyes of the counterparty
  • Monte Carlo simulation may be used to determine the likelihood of value conclusion below the current asking price
  • Develop a negotiating strategy to determine how to engage with the client on transaction’s financial terms
  • If the client is the seller, provide guidance on items to include in the data room
  • Prepare and perform due diligence
  • Create structure for letter of intent
  • Assistance in discussions with the counterparty regarding terms and conditions for purchase and sale agreement

As an example of the power of Monte Carlo simulations in our M&A valuation indications, as an acquirer when calculating the value of a prospective target company, it’s insightful to know the range of possible values based on the relevant forecast assumptions.  In addition, knowing the chance that the acquisition will have zero value to a strategic or financial buyer if economic and performance conditions do not materialize can be a source for negotiating LOI terms that support earnout provisions.

Here is an example of a simulation output for a prospective target.  The 80% valuation range is between -$312,000 and $1,400,000, with a mean of $524,000 and standard deviation of $683,000.  In this example, we estimated a 23% chance of losing money, but there was substantial upside if aggressive performance milestones were met.  A good case for a well-developed earnout provision.

How does the performance impact contract negotiations? Especially when the mid case (50th percentile) reflects a breakeven in year 2 but the downside (5th percentile) indicates that the road to profitability could be longer unless specific milestone targets are met.

We can provide a structured approach to screening candidates and support you in building a plan to a successful purchase or sale at a price and terms that are tailored to address your strategic planning goals.