Capturing That Elusive Strategic Value In A Business Sale
Topics: business broker, merger and acquisition, sell a business, EBITDA financial Multiple, strategic value
Wow did I get a real world demonstration of the saying, “Beauty is in the eyes of the beholder.” If I could rephrase that to the business sale situation it could be, Strategic Value is in the eyes of the particular buyer.” We are representing a small company that has a patented and somewhat unique product. They have gotten distribution in several hardware store chains, Lowes, and are going into Wal*Mart next spring.
The owners are at a cross-roads. To keep up with their growth in volume they recognize that they require a substantial capital investment. They understand that they have a window of opportunity to achieve a meaningful footprint before a much better capitalized competitor produces a similar product and undercuts their price. Finally they realize that a one product company at a big box retailer is quite vulnerable to the inevitable rotation of buyers or a change in policy that bumps them out of 25% of their sales volume.
The good news is that their product is unique and is protected for 15 more years with utility patents. It is not a commodity so it achieves healthy margins. The product is an eco friendly product so the retailers value that. Finally, the product can be used in retailer programs where it is combined with other same category products for the spring tune up and the fall tune up. It helps drive the sales of other products.
The ideal company buyer is a larger company that provides products in the same category and sells to the same retailers. They could plug this product into their existing distribution channel and immediately drive additional sales. They would strengthen their position within their accounts by offering an additional product, a unique product, an eco friendly product, and a product that would promote companion product sales. It would also provide a unique door opener to other major accounts that would want this unique product.
With the input from our clients we located a handful of companies that fit this profile. We were pretty excited at the prospects of our potential buyers recognizing all of these value drivers and making purchase offers that were not based on historical financial performance. The book, memorandum, confidential business review, executive summary, or whatever your business broker or merger and acquisition advisor calls it, will certainly point out all of the strategic value that this company can provide the company that is lucky enough to buy it.
As part of the buying process we usually distribute the book and then get a round of additional questions from the buyer. We submit those to our client and then provide the answers to the buyer with a request for a conference call. We had moved the process to this point with two buyers that we thought were similar companies. The two conference calls were totally different.
The first one included the Merger and Acquisition guy and the three top people responsible for the product category. Their questions really indicated that they were used to being leveraged as a commodity provider by the big box retailers. Why were co-op advertising costs so high? Were they required to do that again in order to stay on the shelves? Were they on the plan-o-gram? Was Wal*Mart demanding that they be at a lower price than Lowes? What about shipping expenses? Why were profits so low? We had a very bad vibe from these guys. They were refusing to recognize that this was a high gross margin product growing in sales by over 200% year over year and had a higher level of promotional expense than a mature commodity product line. We couldn’t determine if they just didn’t get it or were they being dumb like a fox to dampen our value expectations.
The second call from the other company included the Merger and Acquisition guy and the EVP. The whole tone of the questioning was different. The questions focused on growth in sales, pricing power, new client potential, growth strategy, their status at the major accounts, remaining life on the patent and what their strategy was for new categories and markets.
Well we got the initial offers and they could not have been more different. The first company could not get beyond evaluating the acquisition as if it were a mature, commodity type product with paper thin margins. Their offer was an EBITDA multiple bid without taking into consideration that the product sales had grown at over 200% year over year and the marketing and promotional expenses were heavily front end loaded.
The second company understood the strategic value and they reflected it in the offer. It was not an apples to apples comparison, because the second offer was cash at close plus a significant earn out component while the first offer was all cash at close. However, the conservative mid-point of the combined cash and earn out offer was 300% higher than the offer from the first buyer. This was the biggest disparity between offers I have ever experienced, but it was quite instructive of the necessity to get multiple opinions by the market of potential buyers.
There are some companies that no matter how hard we try will not be perceived as a strategic acquisition by any buyer and they are going to sell at a financial multiple. Those companies are often main street type companies like gas stations, convenience stores and dry cleaners that are acquired by individual buyers. If you are a B2B company, have a competitive niche, and are not selling into a commodity type pricing structure, it is important to get multiple buyers involved and to get at least one of those buyers to acknowledge the strategic value.
Dave Kauppi is president of Mid Market Capital, Inc. MMC is an M&A advisory firm focused on middle market strategic business sellers. Dave a licensed business broker and a member of IBBA and the MBBI. Contact (630)325-0123 davekauppi@midmarkcap.com or www.midmarkcap.com
Previous Articles Highlighter:
Georgia Lake Communities Offer Luxury And Serenity (1)
At Lake Arrowhead, for instance, the future plans include a full service marina with storage facilities for residents, as well as the fine dining experience of a world class restaurant on the lake that features gourmet dining al fresco overlooking the mountain lake.
Top 5 Credit Card Offers (2)
Many airline reward cards offer a nice bonus incentive when signing up for there card. 2) Balance Transfer Cards: these cards typically offer a low or 0% APR to get you to transfer balances from a higher interest rate cards.
At One With Nature In A Georgia Lake Community (3)
All of this creates an environment where stress can be an everyday reality. This way of living will eventually have you craving for something completely different. A place where peace and relaxation is the norm, and an emphasis is placed on a slower pace.
How To Get Lower Rates On Your Student Loans (4)
Some lenders offer a reduction after you make 36 on-time payments. And other lenders offer a quarter-point reduction for borrowers who agree to have payments automatically debited from their bank accounts.
7 Ways To Balance Your Budget And Come Out Ahead At The End Of The Month (5)
By making the monthly payments only, you will never pay your credit cards off in full. Even if you have to refinance your house to do it, if you are serious about trying to balance your budget, pay off your credit cards and never use one again!
Investing In Rental Properties (6)
When it comes to investing in rental property, there are other aspects that need to be taken into consideration before you make the final decision. First of all you have to find the correct residential housing in your area or an area that you know is good.
Real Estate Investment Trusts (7)
The main variation is that in case of investment trusts the annual tax information should be provided to the investors. However in case of limited partnerships there is no need to provide for the tax information.
Why Is Business Insurance Important? (8)
The use of business insurance is also important as a form of protection against personal liability. Personal liability is when a business owner or owners can be held personally responsible for injuries or damages that occur on the business property or during the course of normal business operations.
Brits Could Face 'Financial Crisis' (9)
Out of those who lack any form of protective policy, 20 per cent stated that such insurance was too expensive. Meanwhile, nine per cent of respondents reported they were prepared to run the risk that they will not become ill or die prematurely.
How To Avoid Foreclosure Plus Keep Your Home (10)
How Best to Avoid Foreclosure? The best ways to avoid foreclosure is to make sure that you pay your amortizations religiously. One of the keys to avoid foreclosure is to live well within your means and to save as much money as possible.
What Is The Prime Rate? (11)
This is why the rate for a credit card from your bank may not be the same rate as charged for a home loan. There is no hard and fast rule but the usual prime rate set by banks is about three percentage points higher than the Federal Rate.
What To Put Down To Get A Good Mortgage? (12)
If you saved enough to put down a large down payment, let's say 20 percent, you should first check how much you could afford in monthly payments. The reason behind this is to leverage and keep funds liquid for other purposes.
Can Consolidations Affect My Credit? (13)
You will be able to choose a loan that will work for you and know that you are in better control of your debts and your life. With a better FICO score you can have access to higher limits of credit, loans faster, and rescue the amount of your hard-earned income being spend on interest payments.
Can Bad Credit Affect My Student Loans? (14)
Meet all of your credit obligations and keeping all borrowing to a modest level for a period of time makes you look like a very good risk to loan officers.
Responsible Credit Repayments Are Good (15)
At still other times, we may be looking at carrying out some minor home improvements. Whatever be the purpose behind our look for a loan, the loan amount should be used fruitfully.
Are There Student Loans For Those With Bad Credit ? (16)
Students get lower interest rates in spite of having a bad credit history, at least the best possible from any lender in your situation. Additionally, the students get a second chance to rebuild their credit ratings.
With Interest Rates Rising How Do I Find The Cheapest Loan? (17)
If a student has bad credit due to late payments or payment defaults on previous loans, the best way to overcome that problem is to have a co-signer. Excellent or good credit of the co-signer gives more assurance of the safe return and the lender is willing to reduce the rate of interest.
Real Estate And Land Investing Companies (18)
The best way to deal with a company is to search for the company in the internet. The second way is to ask people like friends and family members about the authenticity of the company.
Commercial Property Forced Appreciation (19)
Decreasing expenses is another way to get money out of your property. These expenses include property tax, utilities, maintenance, management efficiencies and insurance. These expanses can all be passed on to the tenants.
A Few Things To Consider If You Plan To Buy A Penny Stock (20)
Of course, there is some debate on whether they are truly synonymous terms since the classification of a micro-cap stock is often based upon it relative market capitalization rate, while a penny stock is usually identified by its actual per share price.
Newer Articles Highlighter:
Choosing Which Waleska Golf Course Communities To Live In (1)
Many of the lake front homes have their own large boat docks and boat lifts. Another good feature is that the lake only varies a little in depth throughout the year since it is spring fed.
Can I Rely On The Rental Car Insurance Supplied By Golden/Platinum Cards? (2)
Make sure that you read the fine print and are aware of the coverage that it provides before your next car rental. For Canadian car rentals, Discount Car offers a wide variety of vehicle choices for all your car and truck rental requirements with locations from coast to coast.
Those From Suffolk Are 'Struggling With Debts' (3)
Meanwhile, David Ruffley, MP for Bury St Edmunds, reported that despite the county's reputation of prosperity the impact of the credit crunch is hitting both individuals and local businesses "hard".
OMVIC Warns Auto Buyers Tempted By U.S. Pricing (4)
vehicle is imported into Canada. Again, every manufacturer differs regarding warranty coverage. In the event the warranty is compromised, the dollars saved during the initial purchase could easily be eroded by repairs required down the road.
Atlanta - Hub Of The New South (5)
Topics: top homes for sale in Atlanta The word is out. Atlanta is the place to be. According to statistics gathered from various sources, Atlanta has ranked first in the nation for new home starts for the past thirteen years.
Rise In Inflation Pressures For All Brits (6)
The news comes despite falls in levels of electricity and gas inflation. Commenting on the figures, Shona Dobbie, head of the Alliance Trust Research Centre, said: "Inflation pressures are starting to rise again.
Things To Consider When Buying Your First House (7)
You will get lots of questions about your mortgage selection: fixed rate, a tracker or a standard variable rate? What do they all mean? You will need to understand them and be clear, most high street banks/ mortgage lenders will help you with this and it is best to see a few before going ahead.
New Home Builders In Atlanta Are Ready To Build Your New Custom Home (8)
Choosing the community you want to live in, though, could create a problem, because there are so many new communities and subdivisions being built. This gives you a great variety of places to choose from, including some of the top new lake communities in Georgia, some of the top Georgia golf communities, and some of the top gated communities in Atlanta.
Top Secrets On Successful Forex Traiding (9)
Since we now know that it is not as easy as it seems to make money on the Forex market, why do some traders succeed while others fail? That is not an easy question to answer.
Apartment Living 101: Subleasing (10)
Nonetheless, there are several things you should keep in mind when deciding to sublet your apartment. Keeping it Legal Before you start showing people your apartment, you first need to check with your lease to make sure you are allowed to sublet the apartment.
The Atlanta Population Continues To Grow (11)
Just because you are not living in the city, does not mean you can't find the top homes for sale in Atlanta in the countryside. Lake Arrowhead is an exceptional residential lake and golf community so close to the conveniences and attractions of the south's largest urban center, yet so very far away from the hustle and bustle of the big city.
Drop Noted In Consumers' Financial Confidence (12)
Meanwhile, the company's present situation index, which tracks the public's feelings about Britain's present economic and employment situation, decreased by three points to 99. Commenting on the figures, Fionnuala Earley, chief economist for Nationwide, said: "Consumers' confidence seems, so far, to have remained resilient in the face of the recent highly visible upset in the financial markets.
A UK Employee Can Claim Tax Relief Using Their Vehicle For Work (13)
Using different vehicles during the tax year is not relevant. The total mileage of all vehicles used is the relevant figure. However being paid a mileage allowance by more than one employer is relevant.
Foreclosure - How To Make Money In Real Estate Through Foreclosure (14)
Purchasing the home from the buyer and not allowing the home to be foreclosed will help your client. First, your client will not have a foreclosure on their credit.
Color Is An Easy And Inexpensive Renovation (15)
But if your budget and time constrains do not allow you to indulge yourself with such additions or alterations in your current residence, with a little creativity and some work, a fresh paint job on the walls, using a more vibrant or subtle color, can brighten up your house and give you the feeling of renewal without emptying your bank account.
What Is A Direct Deposit? (16)
While most of the process is similar between all banks and credit unions there may be some unique features that your bank uses that you may need to know about.
Top 7 New Home Buying Mistakes (17)
At present, the buyer agent's services are paid for out of the builder's marketing budget. Using the builder endorsed financing company out of convenience. - Many large builders have their own in-house financing company and they often offer incentives on their products by tying in the use of the incentives to financing through their in-house lender.
The Best Credit Cards Are Not Always Judged By Interest Rates (18)
It may start out low and then after a set time, or some other trigger factors, can shoot the rate into the sky. Kerry Ng is a successful Webmaster and publisher of The Great Credit Card Tips Blog.
Scope Of Investing In Real Estate And Land (19)
There are also other advantages of investing in real-estate. Returns on investment in real estate include cash flows after paying annual tax, equity build up through increase in the value of the asset and cash flow after sale of real-estate after tax on the sale is paid.
Practical Self Employed Tax Tips To Save You Money (20)
It may be safer not to claim mortgage interest as part of the home costs. Take care if claiming the wages of a partner against profits. Partner wages can be deducted as a business expense although there are rules which would be applied in such circumstances to ensure the amount paid is both real and reasonable.
Permalink to Capturing That Elusive Strategic Value In A Business Sale