In M&A, You Get What You Give.

In M&A, You Get What You Give.

A piece in the June 2016 issue of the Harvard Business Review titled – “M&A: The One Thing You Need to Get Right” states that;

“Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”

The author, Roger L. Martin, uses examples of large companies using “acquisition[s] to enter an attractive market” stating that they are “generally in “take” mode” and thus fail. Prof. Martin points out that, acquisitions made by companies in “take mode”usually fail to earn a return because “the seller can elevate its price to extract all the cumulative future value from the transaction”.

So how exactly does and acquirer “give” to an acquisition? The author highlights four ways an acquirer can “give” or “improve its target’s competitiveness”.

1. Be a Smarter Provider of Growth Capital – Martin provides three examples of ways acquirers can be better providers of growth capital. 1. By acquiring smaller companies and funding their growth in a way that the capital markets don’t (good in less developed capital markets), 2. By bringing intellectual capital and growth resources, and 3. “facilitate the roll-up of a fragmented industry in the pursuit of scale economies“.

2. Provide Better Managerial Oversight – Another way to “give” is “to provide [a target] with better strategic direction, organization, and process disciplines“. He highlights examples of acquirers who have struggled and succeeded noting that “Better management is more likely to result from PE buyouts“.

3. Transfer Valuable Skills – The third way to “give” in an acquisition is “by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel.” Martin uses the example of PepsiCo acquiring Frito-Lay and transferring “the skills for running a direct store delivery (DSD) logistics system—a key to competitive success in the snack category”.

4. Share Valuable Capabilities – Rather than transfer skills as discussed above, the fourth way to “give” is to share. A good example is Procter & Gamble who shares its customer team, media buying capabilities, and even its powerful brand in some instances.

In my experience, acquirers often look at targets thinking; how will they help me enter a new market, access new customers, scale my technology, etc. Those acquirers tend to accept higher valuations from sellers, thus overpaying for future value that the target is going to add (or might add) to the business.

When I work with acquirers who have plans to improve the target (not use the target to improve the acquirer), they tend to negotiate better deals and have greater long-term success with less pressure for the acquisition to be a game changer for the acquirer’s business.

Are you and acquirer? How do you plan to improve your targets? 

 

Read the full article, “M&A: The One Thing You Need to Get Right“, on HBR.org; HERE .


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
Advertisements

How Do You Value Small Acquisition Targets?

How Do You Value Small Acquisition Targets?

So you decided to acquire a small business. That’s great! Buying a small business (less than $500k in EBITDA) can be an excellent way to start an M&A program, add tangible financials to a new business, build a customers base, and more.  While there are plenty of benefits to acquiring a small business, there are also a number of risks. One of the largest risks is overpaying. Acquirers often find themselves asking – How do you value small acquisition targets?

When valuing a small business, comps are usually hard to come by. Public companies, “blockbuster” deals, and industry statistics usually don’t correlate to (very) small business valuations.

For example, large public companies usually trade at an P/E ratio of 10+ and private acquisitions usually price at 4-9X EBITDA. According to the Pepperdine University 2015 Capital Markets Report, the average purchase price for a company with $1 million in EBITDA was 4.5x while deals with over $50 million EBITDA were purchased for over 8x EBITDA. The study also looked at how sector plays into valuation (see image below) but, they don’t have very strong stats on deals that do under $500 thousand in EBITDA.

 

ebitda multiples
Pepperdine University 2015 Capital Markets Report

While traditional metrics don’t really apply to small M&A transactions and most traditional sources don’t track small deals, BizBuySell.com‘s quarterly survey has some very helpful insights.

In their Q1 2016 Insights Report, BizBuySell.com “aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide”. In Q1 they tracked 1,840 transactions with median revenue of $478,000 and median cash flow of $110,000. The average multiple of cash flow on those 1,840 small business transactions was less than 2.5x cash flows, a substantial drop from the 4.5 average for $1 million businesses.

2016Q1_Small_Business_Sale_Price_Multiples
From BizBuySell’s First Quarter 2016 Insight Report

So next time a seller (or business broker) tries to compare their sub $1MM EBITDA business to that deal you just read about in the WSJ or that high flying large cap, feel free to bring them back to reality. Maybe ask them -How do you value small acquisition targets? Remember, it’s important to negotiate a deal that is fair for all parties involved, not just the seller.

Do you have any tips or advice for valuing small businesses? Please feel free to share and comment.


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.