I just spoke at the Wisconsin Institute of Certified Public Accountants Spring Conference and the general sentiment was cautious optimism for the next 12 months.  Several attendees mentioned they only see distressed companies selling and at 0.5x revenues.  Another mentioned his firm has lots of cash and no debt but they are hesitant to part with it.   All-in-all I think many are taking a wait and see attitude - which for the middle is okay, but the strong companies and weak companies may wait too long. Long enough that their moment will have passed.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, CPA, David Braun, External Growth, M&A, M&A News, mergers, Mergers and Acquisitions, valuation, WICPA

Valuing a for-sale opportunity becomes more challenging during periods of economic and financing uncertainty.
During an economic boom, sellers are often able to obtain top dollar due to increased competition among buyers, with readily available financing options.

However, in today’s market, buyers are more cautious about the businesses they are buying and the amount they are willing to pay. Despite a challenging economic market, most sellers have not adjusted their expectations regarding the value of their businesses. Such misperceptions make negotiating a purchase price much more difficult.

An earnout provides a way to bridge the seller/buyer gap with contingent payments that mitigate risk for buyer and creates incentives for sellers/ management. For example, the targets can be based on meeting certain revenue goals or the development of a product. While not new, earnouts are more frequently used during economic downturns and with small, private company acquisitions.

Earnouts are challenging instruments to structure. Since earnouts can result in litigation among the parties, it is vital that the buyer and seller carefully consider the conditions under which future earnout payments will be made.

Since an earnout is based on future financial performance, both parties should be clear about the method for calculating the performance targets (including accounting methods), how much control over the operations of the business the seller retains during the earnout period (including the amount of capital available to fund the business, who has the ability to hire and fire employees, and how strategic business decisions are made), and seller’s remedies (such as a fixed dollar amount of damages) if the buyer breaches its obligations under the earnout.

While earnouts are not appropriate for all transactions and can be complicated and time consuming to negotiate, earnouts provide an additional tool to consider as either a buyer or seller – particularly in an uncertain and challenging economy.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, earnouts, External Growth, Gretchen Johnson, Integration, M&A, m-and-a, mergers, Mergers and Acquisitions, valuation

I wanted to post a quick note about the difference between the valuation of a company and the price that you pay to buy that company.  This distinction came up after a conversation I had the other day with an associate who had difficulty understanding why he was looking at paying a different amount for a company than the valuation his accountants had given to him.

Valuation and price have different meanings and are (usually) two quite different numbers. A company’s valuation is the financial assessment of a business determined by one or more accepted valuation methods, such as Discounted Cash Flow.  Valuation’s main purpose is to figure out a ceiling for what you could pay for the prospect.

The price is the dollar amount that will be negotiated in the acquisition agreement. Remember the core premise that every company is for sale for the right equation. The valuation will certainly form a major part of that equation, but there is no reason to assume it will be all of it.

One of the factors that often must be mitigated is the owner’s ego. For example, your valuation methods may place the value of a company at $35 million, but the owner passionately believes his firm is worth at least $40 million. When constructing your initial offer you may have reason to take into account the owner’s expectation of what he will get for his company.

Other factors that can force a gap between price and value include historic transaction multiples in the industry, revenue replacement issues and even the rumor mill.

I urge you not to throw around the terms price and value synonomously.  As you can see, they are quite distinct. A solid understanding of their differences is essential when discussing dollars and cents during negotiations.

Technorati Tags: acquisitions, Capstone, David Braun, External Growth, M&A, mergers, Mergers and Acquisitions, price, valuation