Frequently Asked Questions
What are the phases in the M&A process?
The main phases in the M&A process from a seller’s perspective are:
Preparation: Before putting a company up for sale, preparing it for the sale process is important. This can include gathering all the necessary financial and legal documents, identifying any potential issues that may need to be addressed, and determining a valuation for the company.
Marketing: Once the company is ready to be sold, it’s time to start marketing it to potential buyers. This includes creating an anonymous company profile document for potential buyers. Once a buyer is interested, they will sign a LOI (Letter of Intent), which gains them access to detailed information via a Confidential Information Memorandum (CIM). The CIM provides financial sales history and thorough company information.
Due diligence: Once a potential buyer expresses interest in the company, they will conduct due diligence to verify the information provided in the CIM and identify potential risks or issues. This lengthy and detailed process involves reviewing financial statements, contracts, legal documents, and other key information.
Negotiation: Once due diligence is complete, the buyer and seller can begin negotiating the terms of the sale. This includes agreeing on a purchase price, defining the scope of the transaction, and outlining any contingencies or conditions that need to be met.
Closing: Once the terms of the sale are agreed upon, the final step is to close the transaction. This involves signing a purchase agreement, transferring company ownership, and completing any necessary legal or regulatory filings.
How long does an M&A transaction take?
The length of time it takes to complete an M&A transaction can vary widely depending on various factors, including the size and complexity of the transaction, the industry in which the companies operate, and the regulatory approval process. On average, M&A transactions take 6-8 months to complete.
What are the common methods for valuing a business?
Market approach — This method looks at the prices of similar companies in the same industry or market. It uses that data to determine the value of the business being valued.
Income approach: This method looks at the business’s expected future income and discounts it back to present value using a discount rate.
Asset approach—This method examines the business’s assets and liabilities and calculates the net value of the assets after liabilities have been subtracted.
Comparable company analysis — This method involves comparing the financial metrics of the business being valued to those of similar public companies in the same industry and then applying a valuation multiple based on that analysis.
Discounted cash flow analysis— This method involves projecting the business’s future cash flows, discounting them back to present value using a discount rate and then summing them to determine the business’s overall value.
How much should I expect to sell my business for?
The multiple of revenue that a business can typically expect to receive when selling their company can vary significantly depending on various factors such as industry, market conditions, growth potential, profitability, and overall business performance. However, a commonly used range for valuing businesses is typically between 1x to 5x or higher, with the multiple applied to the business’s EBITDA. It’s important to note that this is a general range and that each business’s valuation is unique and may be influenced by specific circumstances and negotiations during the sale process. It is essential to work with experienced M&A advisors who can help you determine a realistic valuation for your business based on its unique characteristics and market conditions.
What factors go into valuing a company?
- Consider the impact of market conditions and interest rates on the business and its valuation.
- Assess the level of desirability and demand for the specific business vertical.
- Determine the proportion of recurring revenue compared to the total revenue generated by the business.
- Identify whether the business primarily serves individual consumers (B2C) or other companies (B2B).
- Evaluate the business’s profitability by calculating the percentage of profit, which is the ratio of net income to total revenue.
- Understand the owner’s goals and motivations, as they can influence the sale process.
- Assess whether the business has a self-managed structure with capable individuals to run its operations.
- Analyze the business’s past performance, including its historical financial and operational data.
- Evaluate the business’s resilience to economic downturns and its ability to withstand recessions.
What are valuation multiples?
Valuation multiples are a way to estimate a company’s value based on its financial metrics, such as revenue, earnings, or cash flow.
Valuation multiples are commonly used in the market approach to business valuation based on the prices paid for similar companies in the same industry. By comparing the financial metrics of comparable companies, valuation multiples can provide a rough estimate of a company’s actual value.
Variables affect the multiple, so we recommend working with experienced professionals who specialize in mergers and acquisitions and have in-depth knowledge of valuation methodologies.
Succession Planning
What is succession planning, and why is it important?
Succession planning determines how a company will move forward when ownership leaves the business, whether due to unplanned or planned circumstances. Companies should be prepared to continue operations effectively if an owner exits the business.
When is the best time to create a succession plan?
Even if a business owner is not ready to exit their business through a transaction, it is vital to have a plan in place in case something unexpected like illness or death occurs. This ensures some stability for both the company and the owner’s family.
What is the first step in business succession planning?
The first step in creating a successful succession plan is to determine your goals as the owner exiting the business, both personally and with the company. How would you want your company to move forward if you had to face an unexpected medical emergency?
What are the best practices for succession planning?
The best practices for creating a succession plan are knowing your company’s financials and having an effective managerial structure with employees who can carry the company forward in the case of an owner’s exit.
What is the Difference Between a Merger and an Acquisition?
Merger: This typically involves two companies combining to form a new entity, where both companies’ stocks are surrendered and new company stock is issued. It is more of a peer-to-peer situation.
Acquisition: A transaction where one company purchases a portion or all of another company’s shares or assets. Acquisitions are typically made to take control of, and build on, the target company’s strengths and capture synergies to move business goals and ownership objectives forward.
What are buyers potentially considering when looking for companies to purchase or invest in?
- To grow or expand market share quickly.
- To diversify product offerings or enter new markets.
- To achieve cost efficiencies through economies of scale or synergies.
- To acquire new technologies, talents, or intellectual property.
- To eliminate competition or consolidate a fragmented industry.
- To acquire a business as a personal goal of entrepreneurship.
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