There is perhaps nothing that can produce more hand-wringing and frustration than a valuation leading up to a sale. The following strategies can help you get a realistic valuation.
The Most Common Misconceptions
Many CEOs have no insight into the value of their business, or base their assessments of value on their emotional attachment to the business. This can cause them to walk away from good deals and to ignore deal terms in favor of the highest dollar offer.
What Makes for a Realistic Valuation
The key to a realistic, accurate valuation is to evaluate the company from the perspective of the buyer. What does this business offer to potential buyers? What synergies might a buyer seek? Don’t just fixate on EBITDA multiples. Look for the premiums that your company can offer to a specific type of seller. Do you have valuable intellectual property? A streamlined process that can complement an existing business? Highlight these features early.
Other Common Valuation Mistakes
Some other common valuation mistakes include:
- Thinking only of the US economy as it relates to US buyers. Foreign investors continue to view American companies as attractive acquisitions.
- Getting a valuation for estate planning purposes. These estimates are usually only based on EBITDA, and offer little insight into actual market value.
- Not realizing the value of your customer relationships, or relationships to other entities, such as regulators or suppliers.
When to Consult an Investment Bank
It’s never too early to prepare for a sale. There are many things owners can do to improve their EBITDA multiple, but this becomes more difficult on a shorter time line. For instance, addressing issues of customer concentration takes time. Fail to adjust them and watch the price get discounted. An investment banker can critically evaluate your options, help you implement meaningful change, and ultimately help you get a higher multiple and better deal terms.
The Importance of Fit
Failures of cultural fit are the primary reason that mergers fail. Due diligence needs to go both ways to prevent this catastrophe. Sellers should not be intimidated out of asking buyers clear, pointed questions. Talk to strategic CEOs, private equity CEOs, and anyone else who might be a good fit. Ask for references, then get clear details about the overall experience with the buyer.
Companies are seeing record valuations, even when they have serious shortcomings. This has been a long cycle. Most analysts think it will continue another year or two, with no softening. So now is the time to sell, or begin planning for a sale. The future is always uncertain, but you gain more control over it when you streamline your operations and work to increase value.
About Kratos Capital
Trying to manage a transaction on your own is a fool’s errand. The expertise of an advisory firm can help you better understand the other side’s motivation, and then challenge this knowledge into the best possible deal. As you navigate the process, partner with an M&A advisory team that boasts expertise in your industry. Kratos Capital can help.