The Key Question in M&A: What Is the Value of My Business?

01 November 2018

The Question that Crops Up Without Fail..

by Geert Kruiter, SVP, the Netherlands

In our profession, we speak at length with business owners/shareholders about the uniqueness of their company, what they have accomplished, their products and how proud they are of their team. However, in the end, they invariably ask the same crucial questions before engaging us: “What do you expect will be the value of our business at sale?” and, “Does it make sense to start the M&A process now or should we wait till ……?”

Obviously, everyone likes to have this question answered before committing to any associated expenses. But, to be honest, how seriously do you take your GP if he simply listens to your ‘story’ but doesn’t examine you properly? Or, to use another metaphor, a real estate agent, who tells you the price of your house based only upon the prices of other houses in the area?

Valuations based on Whimsy Do You No Favours

Listening to such ill-founded valuations is the worst favor you can do yourself in assessing the value of your business, which is partly rooted in your past but, primarily in your future. For example, in your home you may have over-invested in a luxury bathroom or kitchen, kitting it out in a way not many people might like. But in your business, your significant past efforts should show real results in the future.

Your M&A Advisor's Most Critical Task is to                                                             Make Your Business' Value Tangible

The key task for your M&A advisor is making this visible and tangible. This is however, not a trivial exercise. Not only does it require a detailed understanding of your current business, as well as past and scheduled investments, but it also necessitates the need to demonstrate how all of this translates into superior and predictable growth.

In the first instance, it's a simple necessity to get this done, mapping it out across several scenarios, with contingency planning in place. Once completed, the number crunching can begin, to calculate a precise business valuation, including a sensitivity analysis. It isabsolutely essential that the underlying data holds up in conversations with potential buyers.

Once the exercise is completed, the time has come to validate the outcome against comparable deals in the market. The outcome of a detailed business valuation shows the multiple of your revenue and profit against your last year and current fiscal year - Not as a target but as a result.

Situations where we end up with much higher figures than for similar deals, force us to examine the data further or to create the right narrative around why this particular business is so much more valuable than other comparable deals.

The Software Tech Sector - Fast Paced, Dynamic, Scaleable 

This exercise is crucial to developing the equity story for a client. To undertake it, requires Boss Equity to have a detailed understanding of the industry a company operates in. This is the main reason we remain specialists in the Software Tech sector. We can help software or IT-Services companies simply because all the partners within Boss Equity have run and operated their own software businesses in the past.

Without understanding the nature and fast dynamics of the software and IT industry, it would be too difficult to advise on these critical issues. The scalability in the software industry is probably second to none, perhaps only matched in the Pharma- and Life Sciences industry, where we also see a dynamic M&A market, with the corporate giants paying incredible valuations even for loss-making companies.

Negotiating the Best Deals for Our Clients

But these large buyers are not stupid in paying incredible valuations; they have a deep understanding of the market and see the potential to scale up fast. Understanding these dynamics and tapping into and understanding the potential for large buyers is an essential element of our daily work, handling, managing and negotiating the best deals for our clients.

Do Not Leave Money on the Table When Selling Your Business

However, we never pronounce on the value of a business without first undertaking a proper diagnosis, after which we can say something that bears scrutiny about the precise value of your business. It takes far more than a few clicks on an online form to determine the value of your business; if you do go this route, however, and sell your business to savvy buyers, you will sadly never know exactly how much money you left on the table.

by Geert Kruiter
SVP – Deal maker, Boss Equity