What is the top misconception CEOs have when it comes to
valuation?
Many CEOs have no idea what their companies are worth. Some have unrealistically high expectations and others’ expectations are too low. In either case, money is often left on the table. A seller with unrealistically high expectations, may walk away from a good deal. A seller who values his Company too low, may take the first, but not the best offer available.
How can sellers arrive at a realistic valuation?
Sellers should look at their company from the perspective of the buyer, not the seller. What’s motivating the buyer to do the transaction? What kind of synergies are they looking for? What makes your Company attractive to a particular buyer? Don’t fixate on EBITDA multiples alone; there’s more to consider.
There are many instances where a buyer will pay significant premiums to gain a particular attribute. For example, a Seller’s company might have intellectual property that’s not reflected in the numbers but represents an opportunity to the buyer; or the Seller may have significant market share in a specific geographic region that the buyer wants. There are many instances where foreign buyers are paying premiums to enter a particular U.S. market.
What other misconception do CEOs have regarding valuation?
Often CEOs get a valuation for estate planning or other purposes which may not be a good indication of market value.
For example, we represented the seller of a manufacturer that seemed to have a very simple business that would likely go to a strategic buyer in the same industry. The typical industry multiple for this type of company was around six to seven times EBITDA. But this business had a key asset; a relationship with a government agency that was key to its business. The Company sold to a large foreign buyer that wanted to enter into the U.S. market and was willing to pay a significant premium to get into this market and have the benefit of that relationship.
When should a potential seller consult with Chapman Associates?
The earlier the better. We see EBITDA multiples in ranges. Why do some companies in the same industry sell at the lower range and others sell at the higher range? There are many reasons: size, geography, intangibles, relationships, growth rates and more.
Business owners can improve their multiple, but these things take time. For example, heavy customer concentrations or supplier concentrations can result in a discount by buyers. Decreasing concentrations in either area takes time. If a business owner is thinking of selling in two or three years down the road, now is the time to speak to the appropriate professionals so you can identify areas for improvement and create a strategy before you go to market.
How can sellers make sure a buyer is the right fit?
We think the due diligence process should go both ways. We encourage sellers to ask the prospective buyer detailed questions and seek information. Call the sellers of the other portfolio companies acquired by your suitor and ask about the overall experience with the buyer both during and after the sale.
