CEO Advisor, Inc. has decades of experience in mergers and acquisitions (M&A). The following are some need to know factors about valuation and M&A.
EBITDA Multiples Drive Acquisition Deal Prices
Most acquisition deals are valued off of financial metrics and completed deal comparables. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, is the key metric for applying a multiple to derive the value of a company. Corporate mergers and acquisitions (M&A) departments (strategic buyers) and Private Equity firms (financial buyers) value deals based on EBITDA multiples. The EBITDA multiple is affected by the company's industry, size of the market, revenue growth rate, recurring revenue, gross profit margin, management team, intellectual property, EBITDA, EBITDA growth rate and other factors.
You Have to Stay On
M&A isn't a one-time cash-out, at least not anymore. Most acquisition deals have a 2-3 year retention of the owner(s) or CEO, seller notes and potentially a 2-3 year earn-out. Assume if you get acquired, you're committing to a minimum of 24 months with the acquiring company in a specific role. This is critical to getting a transaction done, and you should show a world of enthusiasm to help the buyer grow the combined business after closing the deal.
Acquiring Companies Don't Buy Low or No-Growth Companies
A ten year old company that is growing 10% per year is of little or no interest to strategic buyers. A financial buyer, such as a Private Equity firm, may be interested if a strong fit, but at a depressed valuation. It is critical to fix your deficiencies and excel in all aspects of your business to optimize your value and attract buyers. CEO Advisor, Inc. works with CEOs to accelerate growth, as well as, create an exit strategy and provide M&A advisory services to facilitate the entire sale process.
Companies Don't Buy Startups or Small Companies
There are 1,000 companies that Apple, General Electric, Microsoft, Google, Salesforce or Facebook could buy and all could make strategic sense. But that's not how M&A deals happen. It's when a CEO sees a strategic gap, or a SVP sees a gap in what he/she can get done in the next 12-18 months - and fills that gap with an acquisition, right or wrong. In the end, corporate M&A departments have limited time and a very specific M&A strategy.
Smaller companies clearly enter the radar screens when they approach $10 million in sales. Your goal is to reach $10 million in sales in a profitable manner as soon as possible through organic growth or acquiring a company. The great majority of the time M&A deals actually happen when a CEO, president or business owner has an experienced team of advisors (M&A advisor like CEO Advisor, Inc., corporate/transaction attorney and tax advisor) behind him/her working extremely hard for 6+ months to seek out a buyer and get a transaction to closing.
Knowing the "Value Drivers" is Critical
Once a Letter of Intent (LOI) is signed, the acquirer will spend a substantial amount of due diligence effort to identify the sources of value (Revenues, Gross Profit, Gross Profit Margin, Quality Customers on Contracts, Recurring Revenue, Technology and other Intellectual Properties, Management and Personnel, Brand, EBITDA, EBITDA Growth) from the deal. It is essential for you to maximize these value drivers and present them to potential acquirers clearly and distinctly.
CEO Advisor, Inc. provides mergers and acquisitions advisory services to CEOs, presidents and business owners of small and mid-size companies. Contact Mark Hartsell, MBA, CEO of CEO Advisor, Inc. at (949) 629-2520, by email at mhartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.