Tag Archives: acquisition

Strategic Mergers and Acquisitions for Fast Growth Firms

I’m working on a “How To” series on Strategic Mergers and Acquisitions for Fast Growth Firms. It covers the tools, skills and processes needed by firms pursuing acquisitions as a tempting path to growth. This is an audio presentation accompanied by detailed notes, checklists and templates.

Strategic Mergers and Acquisitions for Fast Growth Firms, Series 1 – Buy Side, Capturing Value Beyond Price

Highlights from Series 1: Buy Side

  • The M&A Process from the buy side
  • The Wealth Esteem M&A Checklist Methodology
  • Special types of M&A deals
    • the true “merger”
    • “Bolt-on” acquisitions
    • Vertical and horizontal integration
    • Diversification
  • M&A target identification and deal flow
  • Managing the M&A Project
  • Key roles and members of the M&A team
  • Valuing the business
  • M&A Negotiation
  • Earnouts
  • Financing the deal
  • M&A Due Diligence
    • Finance
    • Legal
    • Intellectual Property
    • Human Resources, learning & development
    • Marketing
    • Sales
    • Manufacturing and operations
    • R&D and innovation
    • Logistics and distribution
  • Integrating the Acquisition – the forgotten part of the Deal
    • the whole is greater than the sum of the parts
    • mitigating risk
    • integration planning
    • measuring integration success
    • practical integration improvement
  • Good to great: Post-Acquisition Review

Coming soon: Strategic Mergers and Acquisitions for Fast Growth Firms, Series 2 – Sell Side, Your Exit Strategy.

Private Company Valuations

An unreal valuation is a price that a strategic investor pays because they have non financial objectives.
Fred Wilson A VC via twitter

That really puts the concept of the Strategic Sale succinctly. When the fit of the vendor’s business to the acquirer is so compelling, that traditional accounting based measures are not sufficient.

Acquiring a private company

I’ve been negotiating the potential acquisition of a private industrial company. All the details are covered by a non-disclosure agreement, so I can’t provide a case study (yet).

At this point in time the deal is not going through once we asked the target what their price expectation was. The target has retained the services of an accounting firm and are obviously being fed strategy from their advisers. This is a good idea, except when the advisers queer the deal.

From my analysis, the target company is barely making money. From the accountants approach, they’ve produced a set of accounts with huge add-backs to support a high purchase price. Add-backs are expenses incurred by the owners/managers of a private company that an acquirer can reasonably expect not to incur. For example the all-expenses paid “Manager’s Conference” on the Gold Coast by the directors and their spouses, it’s just a legitimate perk that a public company would not continue.

So there is an initial dispute over the actual earnings of the business. I don’t see that as an insurmountable obstacle. That can be verified during the due diligence phase of the acquisition.

The accountant is pushing for a valuation of 5 times EBIT (Earnings Before Interest and Tax). Let’s assume we’re looking at a valuation around 3 times EBIT which is in line with typical family-owned businesses and business-broker transactions. So once we resolve the multiple, we determine the purchase price during due diligence.
What other flies are in the ointment? What if the family have debt that needs to be cleared out of the sale of the business? In that case discussions about multiples of EBIT are irrelevant. The debt needs to be addressed and that calls for a different set of solutions.

Additionally if I am correct and the business is not really making any money, we could acquire the assets in 6-24 months if the company goes broke. Not an ideal outcome as I’d rather have a going concern rather than a shell. However the risk of running out of cash is significant.

I don’t have enough information to determine this yet. I’ll update later once I’ve done some more research.