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M&A Valuation Driver Basics

Posted by sb_admin on August 24, 2019
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Selling your company can feel daunting, but there is a proven model for increasing business value and successfully closing deals. The goal here is to focus on drivers of valuation. Here’s what you need to know. 

Primary and Secondary Valuation Drivers 

You can achieve a premium valuation by properly positioning your company as an investment opportunity and diligently managing the sale process. The right M&A broker can help you identify primary and secondary drivers of value, but in general, recurring revenue streams, a strong management team, excellent brand reputation or corporate goodwill, and steadily increasing profits drive value higher. 

Positioning the Business 

Properly positioning a business as an investment to the investment community is key to increasing value. The right advisor should learn as much as possible about the business, and then distills this information into highlights that will entice investor. This presentation should address two key factors: 

  • What is the intrinsic value or potential value based on current operations and growth? 
  • What is the strategic value to the investor? 

When assessing intrinsic value, some key points include: 

  • current growth 
  • financial performance 
  • brand reputation 
  • existing customer base
  • management team 
  • competitive dynamics 

Strategic value is harder to capture, and depends on the specific purpose for which the acquirer hopes to acquire the business. Many hope to add a new offering to their existing platform, while others hope to build synergies between the two companies. Highlighting this value can drive the offering price much higher. 

The Importance of Projections 

Reliable projections are a key value driver. Unfortunately, they’re also often imbued with a hefty dose of wishful, or even magical, thinking. Buyers are inherently risk-averse. So when they see unreasonable projections, they become skeptical about everything you say. This is why it’s important to balance the desire for impressive projections with the buyer’s need to believe what you say. The right advisor can help you look at your projections and assess their reliability. They should be based on specific data from past performance, and should not make unreasonable assumptions, such as that you will suddenly get a new influx of clients. 

The Role of a Skilled Advisor 

The right advisor is part accountant, part deal coach, and part marketing expert. Their role is to help you make aggressive but realistic growth projections. This demands realistic forecasting and a commitment to the ongoing growth of the business. Armed with a reliable, evidence-based valuation, an advisor can help drive value higher by: 

  • highlighting key value drivers and potential areas for growth 
  • preparing key memoranda to attract buyers 
  • protecting confidentiality early in the bidding process 
  • setting reasonable expectations for both parties, reducing the risk that the deal falls apart 
  • freeing your attention and time so you can focus on the business 
  • attracting the interest of multiple potential buyers, thereby creating a competitive bidding environment
  • supporting the negotiation process 

The right advisor is key to the valuation process from start to finish. Indeed, they are a key driver of value, and companies with quality advisors typically sell for more. 

 

About Sunbelt Atlanta

At Sunbelt Atlanta, our team is made up of seasoned professionals with more than 60 years of collective experience selling companies. Our backgrounds and industry experience are as varied as the companies we represent. Some come from main-street, some from wall-street. Collectively, we have closed more than 500 transactions and the companies we have sold range in size from $50,000 to $25,000,000 in transaction value and span all industries. 

One thing our professionals have in common is that they all have first-hand experience initiating, negotiating and managing the deal process. We can bring a main-street tenacity to a middle-market transaction and middle-market finesse to a main-street transaction.

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