Mergers Acquisitions & Divestitures
Within mergers, acquisitions and divestitures, people or companies interested in acquiring other firms or even selling their company, should be cautioned. There are specific strategies that must be implemented if a business interested in merging, acquiring or selling achieves desired results. It makes absolutely no difference whether you are on the acquisition or divestiture side of the equation as far as the need for the development of a strategy is concerned. If you want to meet desired results, you need to be strategically prepared because the entity you deal with will be prepared to deal with you!
There are three separate areas that must be considered by any party acquiring or divesting of a business enterprise. In this article we will explain the importance of each area, examine more in-depth each area and the purpose it serves in the overall realm of mergers & acquisitions. It is imperative that interested parties understand to the fullest extent, each of the following topics.
How to attract Qualified Buyers
The first phase in preparing a business for acquisition is understanding how to attract qualified buyers. Knowing what a prospective buyer is looking for in an acquisition, and properly preparing a presentation package that includes adjusted financial statements, are essential elements for attracting an appropriate buyer. In addition, the business presentation must offer complete information for the potential buyer to know what they are acquiring.
Knowing how to attract appropriate buyers and knowing what they are looking for about your enterprise are needed cornerstones. Think of a business divestiture as similar to a real estate sale with more underserved transparent moving parts. If your real estate needs repair or cosmetic updates, it canít sell at its best fair market value until those items are fixed. Consequently if a business is having a downswing in sales, or if it has operational inefficiencies, then the business is not in position for maximum value in sale.
A seller must provide transparent documentation to explain the major components of the business. The following are five overall areas that must be taken into consideration:
- A brief history of the company that includes what entails the major aspects of the business, the size of the business, and ownership interests. It is very important that a precise explanation of how the business arrived at its current position be explained.
- Organizational structure and operational aspects of the business should be provided. A summary of how the company operates is critical. If there has been an area of difficulty, it should be explained in detail and presented with opinion of how to create a company enhancement from fixing the challenge.
- An analysis of the overall market position of the company should be provided. The companyís market position is a prime buyer motivator. Keep in mind the better the company market position enhances the fair market value for the buyer.
- The financial aspects of many businesses that are presented to a prospective buyer can damage as much as they can enhance in obtaining a best sale value. It should be recognized, however, that in a closely-held corporation, one of the primary objectives is to keep the taxable income as low as possible while enhancing the cash-flow position of the company. Validated non-essential expenses should be reflected within recast financials to most appropriately reflect the value of the company when measured as a ratio of normalized EBITDA / discretionary cash- flow. Acquisitions are measured for the expected return on investment and a defined timeline of achievement.
- The key personnel, background information and specific duties of each employee should be part of the presentation. In many situations, over the years, companies overlook the valuable services performed by parts of their team. If there are weaknesses within the staff, they may be presented as economic growth opportunity to the perspective buyer. As well, strengths of the company from the same said information should be highlighted. These items give a strong indicator as to where the business is going and growth capabilities.
The second phase is determining the value of a business. Buyers are reluctant to acquire a company when the sale value cannot be substantiated. Consequently, anyone involved in a merger, acquisition, or divestiture must become familiar with regard to methodology used in valuing a business. An Independent Business Valuation that utilizes at least six IRS recognized valuation methods should be completed on any business considering sale. Valuation considerations include determination of market value of assets, recasting of earnings, cash-flow, projecting the growth of the company, and intangibles that create revenue value.
The value of stock in a closely-held company is important to anyone that holds ownership interest. During the existence of every business, at one point the ownership will be transferred, resulting in the need for placing a value on the company, and thus the stock. The valuation process of determining a company worth is not simple. The problem derives from the fact the company itself typically is closely-held. Therefore there is not a readily determinable value to place on each share of stock.
There are however, several methods that are available to businesses in determining the business worth. Each method carries its own set of advantages and disadvantages, dependent the purpose for which the valuation is being performed. While some methods are more appropriate than others for sale value, an understanding of each method s necessary since the Internal Revenue Service, as well as the Tax Court insist that more than one method be used in valuing a business. Since no single method will meet all criteria for establishing fair market value for all parties, multiple methods are considered in the valuation process.