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successful M&A deal

Let’s Make a…Successful M&A Deal! 5 Keys to Landing A Deal You’re Proud Of

Deciding to embark on a merger or acquisition (M&A) is one of the biggest transformations during the lifecycle of any business. Thinking in terms of resources alone, your money, time, and credibility are all on the line here. To land a successful M&A deal, you’ve got to be on top of your game.

If you focus too hard on all that’s at stake, though, you may not be in a position to make the best deal. In other words, don’t miss the forest for the trees—go in with your eyes wide open. Although it can be nerve-wracking to jump into an M&A deal, keeping the below 5 key points in mind should help you get through the process with your nerves firmly intact.

But first…let’s consider what not to do

Pushing through a successful M&A deal like acquiring a competitor or joining forces with a powerful peer is invigorating. But what’s invigorating on the day you sign on the dotted line can quickly deteriorate into something akin to buyers’ remorse if you haven’t thought things through.

Here are just a handful of the mistakes we’ve seen get in the way of a successful M&A deal:

  • Companies WAY overpaying for what they’re buying
  • Leaders forgetting that cultural fit between companies matters just as much (if not more) than securing cutting edge technology or getting a contract
  • Too little too late: companies being slow to consider market shifts and jumping in too late to address their gaps with M&A
  • Not considering the bigger corporate story—big, expensive “surprises” that don’t obviously fit are a tough sell and put you on the defensive with investors, customers, etc.
  • Failing to communicate with all shareholders. Remember, those little shops can band together to become an activist consortium

To avoid adding to this list, consider engaging a team who can lead you through any necessary course corrections. At Audacia Strategies, our core competencies revolve around helping clients consider their bigger corporate story and communicating with shareholders when making big, bold moves like this. You can also make sure everyone checks her ego a the door, by considering the following:

5 Keys to a Successful M&A Deal

1. Deal Fever Is Real.

You and your team have spent late nights, long weekends, blood, sweat, and tears pursuing this deal. You have done all that great valuation work to come up with a fair acquisition price. And now, you’re at the negotiating table (you can almost hear “Eye of the Tiger” playing in the background). And, you’re bidding against other firms… and the price is going up, and up, and up. It’s very easy to get caught up thinking, “I’ll show them. We’re going to win this thing at all costs.” It happens All.The.Time.

Successful M&A DealThe reality is while it’s good practice to come to the negotiating table with a valuation range that you’re willing to pay, it doesn’t pay to start warping your analysis just to “win.” This is how companies end up with massive write-downs a few years after a deal when they can’t achieve the value they needed to make the price they overpaid work.

It may be obvious, but even large companies are susceptible to deal fever. Want an example? See also:

Why does this happen and how can you control for it? Well, the short story is: all business deals are closed by human beings and the decisions human beings make are often influenced by emotional and psychological factors. Executives on both the buy side and the sell side can get caught up in their perception of the company and the management, for example. So, if you feel tensions running high and fear that you or your team are losing touch with your real goals, don’t be afraid to step back from the negotiating table to catch your breath or even walk away from the deal entirely.

Ask yourself:

  • What are the stories we’re telling ourselves?
  • How can we challenge these stories to get to the real story?

And remember Dan Doran’s advice: “Value is analyzed. Price is negotiated.” It’s crucial that you build your own valuation model, one that you’re completely comfortable with and can explain to stakeholders if (or when) challenges arise. One of the worst things you can do is rely on a target’s (very pretty, but very likely) biased projections. Do your own research. Do the work.

2. Due Diligence Is A Lot Like Going To The Dentist.

It is not glamorous, but it is necessary. Due diligence can be the difference between a successful M&A deal and one that feels like getting a root canal. To make this work for you, go beyond the financials (after making sure they work and are coherent, of course!) to really understand the logic behind the deal on every level. You need to consider carefully the reality of your team’s ability to create (or “unlock”) value in bringing two (or more) firms together.

3. Customers Matter.

Once you have your head wrapped around the business valuation and the inner workings of this new mash-up of a business being born, you’ve got to think about relationships external to the organization. Get into the weeds about how strong the current customer relationships are and how they affect the bottom line.

Ask these questions:

  • How much of current revenue depends on repeat customers vs acquiring new customers?
  • What is the cost of acquiring a new customer?
  • How strong is the current business pipeline?

4. Get Real About Your Competition.

You definitely want to take a look at where your target stands when it comes to market share, revenues, and profit, but also dig more deeply. Keep in mind, you are proposing a potential shake-up of the market here. Even if they’re tough to predict, consider all the ways in which this bombshell of a deal is going to have significant ripple effects outward.

Ask these questions:

  • Where in the value chain is your target excelling? Failing?
  • What changes can you realistically make to capitalize on strengths or cut the dead weight?
  • How do they stack up against their peers?
  • How do you expect competitors to react to a combined firm?
  • Will you have the wherewithal to combat a price war for example?

5. The Problem With “Synergies.”

I can’t really remember if Professor Mariann Jelinek shared this pearl of wisdom with us on the first day of my strategy class at The College of William and Mary, but she definitely shared it early and often: “When someone says ‘synergy,’ hold onto your wallet.” Throughout my MBA program and even to this day, I think no truer words have ever been spoken.

As a buzzword, synergy is overused and honestly, a red flag in most cases. Like pretty wallpaper covering an ugly stain, “these teams have a lot of synergy” is a pretty-sounding way of saying very little. As easy as it is for deal participants to get caught up in the possibilities and truly, badly, deeply underestimate the time it will take to achieve whatever they’re dreaming of, it’s equally as easy to overestimate the value of both cost and revenue synergies.

In the rush to eliminate redundancies and expand market share, a lot of details can get overlooked about what the new procedure will look like. Slow down and think things through at each stage.

Ask yourself:

  • How are we going to make more money by putting two firms together?
  • Do we have a crackerjack post-acquisition integration team ready to put our plan into action?
  • Do we have a good sense of what might go wrong in this integration? What’s our worst-case scenario?

Yes, there is a lot at stake when you’re spearheading what could easily be the biggest deal in your company’s history. But you can handle it. You’ve done the work and now you’ve got these 5 keys in your pocket. So you’re ready to seal that successful M&A deal.

Have questions? Want to talk through your deal with an experienced team? Audacia Strategies is here for you. We’ve helped businesses successfully navigate M&A deals and other big transformations. And we’re fun to work with! Contact us at info@audaciastrategies.com or give us a call at 202-521-7917 to schedule a consultation.

Photo credit: kzenon

business valuation

3 Expert Secrets for Getting the Biggest Bang for Your Buck When Selling a Business (Part 3 in our series on Business Valuation)

This is the third part in our series on business valuation. In Part 1, we give you the rundown on public vs. private valuations. Part 2 discusses 5 key factors influencing valuation. This time we are bringing you an expert’s take on common misperceptions, how to get the biggest bang for your buck when it comes to selling a business, and who is likely to be involved in the deal.  

To punctuate our fall blog series on business valuation, we interviewed a friend of Audacia Strategies, Dan Doran, Principal at financial services firm Quantive. As an experienced M&A professional focusing on small and mid-sized privately held companies, Dan has seen it all—or at least, A LOT. He and his team support both buyers and sellers uniquely positioning him to be the voice of reason when it comes to transformative business deals. Check out our full interview here.

If your plans involve selling your business—even if retirement is several years in the future—you need to carefully consider the insights Dan offers here. So let’s look at Dan’s top business valuation strategies for sellers.

1. Think early and often about how to influence your business’s valuation.

In basic terms, business valuation is a snapshot of the health of a business at any given time. We already examined in greater detail how analysts and buyers determine what a business is worth. But value can be boiled down to three things:

  • Earnings
  • Growth
  • Risk

To influence valuation, Dan works together with owners to get them thinking early on about these three aspects of their business. One challenge he often runs into is that business owners tend to think about the worth of their companies only when they are ready to go to market or when an offer comes their way. But, says Dan, “this is actually backwards.”

If you want to get the best price, it’s important to understand how you can best position yourself in the market. And if you aren’t satisfied with your current position, you need time to make improvements before you’re ready to find a buyer.

In addition, there are a lot of reasons why someone may want to know the value of a business, besides being in a position to sell. “There are number of litigation reasons, for example,” says Dan. A business owner might be going through divorce or someone might have died making the value a probate matter. Then, there’s the transaction stuff: buying or selling a company, buy-ins and buy-outs, capital needs, etc. “For all these reasons, it’s important to get to an understanding of where the market will likely price an asset (i.e., the business) at a given point in time.”

2. Mind the difference between valuation and price.

It’s also important to remember that there’s a difference between valuation and price. In the simplest terms, valuation is an analysis, while price can be negotiated. So, what this means for you is if you use an expert like Dan he will build a valuation model to predict where the market would likely price your business.

Of course, any valuation is only as good as the facts and knowledge available. “There’s no such thing as perfect information,” says Dan. In every transactional deal, there will be an asymmetry of knowledge, meaning that buyers and sellers will have different perceptions of what a company is worth. The most timely example of this is Elon Musk’s tension with short sellers a few months back.

Here’s Dan’s take on Tesla:

“This was really a battle of information,” says Dan. “There’s an asymmetry of knowledge and investors in public markets are constantly trying to gain more knowledge to predict where they think price will go. So, Elon is in possession of more facts than these investors and his position has been that the stock is going to grow, whereas short sellers are looking for it to decline. It’s been a battle of information to try to manipulate that stock price.”

But perhaps the biggest lesson learned in watching Elon Musk trying to value (or price?—it’s a bit hard to label) Tesla at $420 per share is that bringing a neutral party to the table during negotiations can help. Regardless of whether Elon was fairly valuing his company, he had no buyers in the end. A good M&A process will have some competition and likely involve negotiations around not only price, but also the terms of the deal.

3. Get the biggest bang for your buck when influencing business valuation.

We’ve discussed in a previous post, how competitive the M&A market is and how important it is for business owners looking to sell their businesses to stand out from the crowd. Our conversation with Dan reinforced this point. With fewer businesses being passed down to the children of business owners, 80% of business owners need to liquidate their businesses to fund their retirements, which means this is a seller’s market.

But where does Dan suggest putting your resources to see the biggest ROI? Well, he says, it’s important to realize that when you have a consultancy like Quantive appraise your company, “essentially what we’re doing is creating a risk profile that becomes a roadmap for what is impeding value and what we should be fixing before we go to market.”

So, again, it’s important not to wait to value your company. You want time to follow that roadmap to improve your position before going to market. “The real question,” according to Dan, “is how do we begin to drive more value and return a bigger rate on this investment?”

To answer this question, you need to think carefully about who your buyer might be and think like her. While the majority of small business owners are baby boomers (65+), buyers are likely to be in the next generation. What do these buyers want? What do they care about? Why is your company a smart investment for them?

And recognizing that we all tend to overprice our own assets can help you adjust expectations. As Dan says, selling a business is really not that different from going to market with a house. “Everybody thinks that their own house is a special unicorn. As a business owner when we go to market we want to get the most for that asset, obviously. But the market is looking at your business relative to alternative investments.”

Thinking of your business in these terms, as one possible alternative in a sea of potential investments for a buyer, you’ll want to look at several key factors to help you stand out:

    • Timing: we want to sell when the company is in a good position and when the market is in a good position.
    • Value of the company vs. how it fits into your overall portfolio: if you’re in a position where you want to liquidate your business to fund your retirement, you’ll want to have these two numbers in mind: how much is it worth and how much do I need?
    • Be ready for the personal transition: Most business owners spend more time working on their company than doing anything else in their lives. So when they sell the company, they suddenly have a lot of time on their hands. You have to look in the mirror and figure out what you’re going to do with that time. Otherwise, what invariably happens is the week before closing people look for excuses not to close. Releasing control can be hard, so make sure you’re ready.

As challenging as it can be to sell your business (which, let’s face it, feels more like “another child”), if you start early, consider how to influence business valuation, and take the necessary steps, you will be happily enjoying mai tais (or another drink of choice) before you know it.

To make the whole process less challenging, it’s smart to enlist the help of experts early on. At Audacia Strategies, we talk a lot about how to differentiate companies in a really crowded field. We can help you negotiate the best possible price for your business. Why not contact us to set up a consultation? It’s never too early to start strategizing!

Photo credit: Dmitriy Shironosov

buying an existing business

So You Want to Buy a Business? Turn Buy-Side Challenges to Your Advantage with Our Strategies

Buying an existing business is one of the best ways to break into a new market, acquire valuable copyrights or patents, or leverage your expertise to steer a stagnating business in the right direction. While acquiring a business typically requires more funds upfront, the risks tend to be less than starting your own business—as long as you buy smart, that is.

We teamed up with Richard Phillips of Crossroads Capital to create a webinar guiding the smaller financial buyer eying the middle market. We’ve included the link to the full 60-minute webinar at the end of this article. Here we specifically address two key insights about buying an existing business: buy-side challenges to consider and how to develop a communications approach that turns those challenges to your advantage. So, let’s get to it!

Buy-Side Challenges Facing Smaller Financial Buyers

Because the mid-market M&A environment is highly competitive, if you are a smaller financial buyer looking at buying an existing business, you are unlikely to be able to compete on price alone. Bigger, strategic buyers will be in a position to offer better deal terms and be able to outbid you in most cases. This means you need to get clear about who you are and what you offer AND you need to be creative in coming up with a strong target list, developing your relationships, and negotiating deals.

First, keep in mind that opportunities to buy are not limited to brokers’ lists or small business auctions. In fact, investment bankers, who advise smaller commercial buyers recommend looking closely at not-for-sale companies. While it is tougher to find business owners who are willing to sell here, when you do find one, it can be easier to close a deal.

One key advantage you have over bigger buyers is flexibility, so use it. Your flexibility may allow you to shape a deal that’s more attractive to the seller. Consider that small business owners willing to sell often have concerns beyond price. An owner who has built her business from the ground up over the past 40 years may prefer an agreement that includes provisions for her continued involvement as a consultant or a guarantee that loyal employees will be protected. Bigger buyers often can’t or won’t make such promises.

Because many owners of middle market businesses care as much (or more) about non-financial concerns as they do about the money, it’s important to think about the transaction from the seller’s perspective. This may be challenging since, as a buyer, you will be primarily focused on the business valuation and financials. But this broader focus will pay dividends in the long run.

As you begin discussions, keep the following likely differences in mind:

  • Personal: Business owners are often at a different stage in life than buyers and have different motivations. This makes sense if you think about when an owner might be in a position to sell, e.g., when she’s ready to retire. Also, according to recent reports, America’s business owners tend to be older (50% over 55). There may be important generational differences between you and the seller.
  • Cultural: While you may be a numbers person, keep in mind that your seller is likely not tracking KPI’s or sweating over spreadsheets. Most business owners in this environment are independent-minded and focused on qualitative measures. Many entrepreneurs build their businesses by making smart short-term decisions and keeping their noses to the grindstone, rather than thinking about their exit strategy. Sweat equity may be all they know.
  • Situational: Above all else, remember that while this may be one deal among many for you, this business owner will likely sell only once. Be respectful of this mindset difference and realize that if the seller expresses “sellers’ remorse,” resistance, or reluctance, he’s probably not trying to be a jerk—he’s trying to get things right. It can also help to keep in mind that you’re both doing something you’ve never done before. You’ve never bought this business and he’s never sold this business.

Overall, if you approach discussions with the owner of a not-for-sale business with an attitude of respect and a willingness to be flexible on the terms of a deal, you both stand to gain. Now let’s get specific about what your approach should look like.

Key Ingredients in Your Communications Approach

Keeping the above challenges in mind, it’s clear that if you approach a potential seller with complicated spreadsheets and graphs, you’re likely to be met with polite stares, if not a quick invitation to show yourself out. This is not to say the numbers aren’t important to a seller, but buying an existing business is all about how you present the rationale behind the numbers, not to mention yourself and your qualifications as a buyer.

Ask yourself: What’s my differentiator?

Although you want to buy this business, your approach should come from more of a seller’s mindset. Your goal should be to articulate your value and sell your organization to the owner. Above all, gain rapport by listening to the seller, figuring out what she needs most to be comfortable selling, and then being willing to adapt to those needs. The bottom line is you have to build credibility with the business owner or you don’t have a deal. Period.

Key ingredients in your winning pitch:

1. Articulate your organization’s value. Be ready to talk about your mission and how buying an existing business fits into the broader vision you have for your organization. Bonus points for connecting this with the seller’s values.

2. Come up with a seller-focused message. Paint a clear picture that explains why this particular business, what your aspirations are for the future, and how you are uniquely positioned to usher this business into that bright future. This message needs to be authentic. If you simply say what you think the seller wants to hear, without buying in yourself, the owner will see right through you.

3. Emphasize how you stand apart from other potential buyers. It’s not unheard of in a competitive environment, such as the mid-market, for there to be 10 other buyers offering all-cash deals. It’s imperative for you to talk about how you and your team could be an asset to the company you want to buy. Talk about the unique strengths can bring that help them achieve their vision for the business.

Again, go beyond the numbers and consider the owner’s mindset. She is considering turning over her company, which is more like her baby, to a complete stranger. You would have reservations too. Help her see past those reservations through your message.

Remember: This is Personal

Finally, as you consider how to set yourself apart from other buyers, know that making the personal connection and gaining the seller’s trust can absolutely determine who wins the sale in the end. You’ve probably heard stories about home buyers in competitive markets writing heartfelt, handwritten notes to sellers and getting the house because of the letter. The same strategy can work in buying an existing business.

But before you pull out the stationary, it’s crucial to locate the point of overlapping values early on and expand on those points of relevance throughout the process. Describe your respect for the seller’s legacy and her motivations, talk about your investment plan and growth strategies, and discuss your philosophy on performance-aligned compensation. In other words, appeal to the owner’s beliefs about what it takes to successfully run this business.

There’s no doubt smaller buyers face several challenges in buying an existing business. But the right communications approach can turn those challenges into a winning strategy. If you remain open to opportunities to show that your aspirations align with the owner’s aspirations and that you can be creative with your deal structure, you can succeed in the mid-market M&A environment.

Once you’ve decided buying an existing business is your next move, it’s time to find the right advisors to guide you through the 16-18 month process. At Audacia Strategies, we’re here to support you before, during, and after your acquisition. We live for strategy!

For additional insights on this hot topic, follow this link to hear Katy and Richard’s full webinar: Succeeding as a Small Financial Buyer in Mid-Market M&A.

Photo credit: Wavebreak Media Ltd

influencing business valuation

Could Your Business Be the Next Apple or Amazon? 5 Key Factors Influencing Business Valuation (Part 2 in our series on Business Valuation)

This is the second part of our series on business valuation. Before you dive in here on influencing business valuation, make sure to check out part one where we dig deep into types of valuation.

In our previous post, we discussed some of the complications involved in determining the value of publicly traded and privately owned businesses. And we want to emphasize that while from the outside it can seem like big corporations are dealing in Monopoly money—business valuation is not (completely) based on concrete, objective measures—strategic investors and private equity buyers do follow some standard assessment practices.

Still, business valuation remains a contentious issue and as a result, many potential sellers approach negotiations with assumptions, rather than knowledge about specific value drivers supporting a realistic assessment of their business’s worth. Since assuming is always inferior to knowing, especially during the negotiation process, it’s worth considering internal and external factors influencing business valuation.

Whether you’re thinking about selling your business in the near future, interested in keeping value drivers on your radar as you grow your business, or looking to get into the investment game yourself, there are key factors influencing business valuation to keep in mind. In addition, CEO Katy Herr will be speaking with our friends at Quantive to get their expert perspective on this timely topic. Check back for a link to the podcast where Katy and the Quantive team will dig deeper into influencing business valuation and transferring value in M&A. In the meantime, here’s a primer.

A Quick Recap

Before we look at the specifics influencing business valuation, let’s remember why this is an important question to ask. Recall that there are a couple ways to assess the value of a publicly traded company:

1. Market Capitalization (cost of a company in “real money”):

  • Market cap = stock price x number of outstanding shares

Following Apple’s ascent into 13-digit territory last month, Amazon’s total market value surpassed $1 trillion last week. Both of these valuations are based on the simple formula above.

2. Enterprise Value (cost to acquire a company):

  • Enterprise value = a corporation’s market cap + preferred stock + outstanding debt – cash (and cash equivalents) found on the balance sheet

This is the formula a buyer might use to determine what would be a fair offer to acquire a publicly traded company.

Now, investors don’t use these formulas when looking at the opportunity or degree of risk involved in acquiring privately held companies simply because they don’t usually have access to this information. Private companies aren’t required to report earnings, stock or share prices, outstanding debt, or cash in the bank. However, as a business owner, you do have access to this information and you could provide it to interested investors or buyers. In fact, strategically releasing this information will likely give you a leg up on influencing business valuation.

What’s really important to understand for our purposes is both types of business valuation, but especially market cap, rely on expectations. So let’s talk about factors influencing business valuation.

Buyers look at the following factors when deciding which valuation multiple to apply to their assessment of your business’s ability to generate income and cash flow. Here is what you can do to put yourself in the best possible bargaining position:

1. Maintain Clean Records

If you aren’t doing this for your own peace of mind and other business benefits, it’s crucial for you to get your books and records in order well (years, ideally) before you start looking for investors or buyers. At a minimum, you will want to keep personal and business expenses separate. Having professionally managed books and a solid financial audit is a smart investment if you are seriously hoping to sell one day. This will also help you understand where you are today so you can target your growth goals and mitigate business risks influencing business valuation. So, do your homework here.

Keeping clean records is the first step toward running a profitable business. But records means more than financials. Make sure all important documentation is well-organized and would make sense to interested parties outside of your inner circle.

Important documentation includes:

  • Financials (balance sheets, expenses, tax returns, credit card statements, bank statements)
  • Audits, regulations, and licensing records
  • Recent legal due diligence reviews
  • Written systems and processes, including employee handbooks and manuals
  • Key employee agreements and noncompetes
  • Customer records
  • Written and assignable customer agreements
  • Written contingency plans for emergencies and other potential disruptions to cash flow
  • Key equipment maintenance records

2. Highlight Positive Trends

Investors want to know when they can hope to see a return on their investment, of course. This means showing a projection of positive, predictable profits is ideal. But if your business is new, this might not be a realistic benchmark.

Typically, analysts and investors will look at the most recent 3-5 years of past performance and 2-3 years of projections in determining value. Be sure to point to factors within your control, such as personnel management and smart cost-cutting maneuvers, as well as external factors, such as industry dips and seasonal declines, to tell a complete story.

It’s also crucial to point out other positive trends influencing business valuation that make your business attractive:

  • Revenue growth rate
  • Consistent gross margins trending upward
  • Higher than average industry operating margins
  • History of achieving financial projections
  • Strong, sustainable, predictable cash flow
  • Consistent history of profitability
  • Solid pipeline of new business and demonstrated ability to convert

3. Be Open to Change

One of the big external factors to consider is how the business will respond to inevitable market adjustments and changes in the industry. With technology and automation bringing about rapid changes in most industries, businesses that show an ability to evolve are most likely to maximize profits and sustain additional growth while keeping operational expenses low.

For companies involved in the production of a product, evaluating your strengths and weaknesses is crucial. Can you increase efficiency, product quality, profitability, or customer satisfaction by outsourcing certain aspects of your supply chain? Should you seek out strategic partners in particular areas?

4. Make the Business Less Reliant on Key Personnel

What would happen if the CEO decided to retire, seek out another career opportunity, or take an extended vacation? If your answer is that the company would not skip a beat, then you are on the right track. Companies that rely on owners who spend a lot of time working “in” the business are susceptible to lower valuations. By contrast, those who can set up reliable processes and trusted management to serve clients can walk away leaving a new individual to run the business.

Bob Moskal at Quantive shared this example:

We worked with a facilities maintenance company to recommend and implement a host of improvements to make their business transferable. For example, we recommended they digitize their record keeping, make their financials useful for running the business not just for tax returns, and transition customer accounts to account managers so that a potential new owner could see that the company could run with the same level of success without the departing owner. Previously, this business would have been heavily discounted or not sold at all. It’s now positioned for growth and a more attractive acquisition target.  

Additionally, the following factors make a business easier for a buyer to take over and manage successfully:

  • A strong, recognizable brand identity
  • For product-centric businesses: a clear supply chain; equipment upgrades to modern, productive equipment; systems in place for identifying and implementing new technology
  • For service-centric businesses: system protocols that have been tested; an established, clear succession chain; well-documented job descriptions and processes for sharing institutional knowledge

5. Be Able to Show Large Market Potential

In one sense, how a business has performed in the past matters less to investors than the potential for future growth. Past performance is only as good as what it tells us about future projections. Many buyers focus on turning around businesses in industries where they have been successful in the past or businesses where they have key contacts who could help increase future profitability.

Because so much depends upon the expectations of individual investors, it pays to focus on factors that will likely influence the market potential:

  • Multiple, strong sales distribution channels
  • Multiple revenue streams
  • A strong industry market share
  • A written and up-to-date business plan
  • Proprietary products or technology

Because all of the above five factors influencing business valuation depend on expectations, the best you can do as a seller is lay your cards on the table in a way that puts your company in the best light. This means putting yourself in the shoes of your investors and considering carefully what would make this offer most attractive.

Finally, if you’re really hoping to get top dollar for your business when you are ready to sell, experts say it’s all about doing the pre-sale prep. Again, according to Bob Moskal, business owners will want to start with due diligence a couple years ahead of time, so they have plenty of time to take steps to correct any “skeletons in the closet” ahead of negotiating a sale.

Also, Bob recommends knowing what your company is worth before starting the process, “we’ve often seen a seller shy away when he starts actual retirement planning late in the game and realizes the value falls short. A good financial planner can help here.” You can hear more of Katy’s conversation with Bob about influencing business valuation when they sit down to record a podcast later this month. We’ll add the link when it’s available. Stay tuned!

At Audacia Strategies, we specialize in putting together communications strategies that helps our clients meet their goals. We’ll be the voice of reason as you figure out how to highlight the key value drivers and tell the story of your current (and future!) success. Our team is all about managing expectations. Contact us to schedule a consultation.

Photo credit: rawpixel

business valuation

Are Apple and Tesla Using Monopoly Money?—Business Value, Valuation Myths, and Your Business (Part 1 in our series on Business Valuation)

This is the first part of our series on business valuation. Check out part two where we dig into what influences these different types of valuation.

Business valuation is making headlines these days. With the announcement that Apple is the first publicly traded company to surpass the trillion dollar mark and Elon Musk making Twitter waves about taking Tesla private putting its value at $72 billion, it can feel like some of the big dogs get to play with Monopoly money.

Adding to this perception that business valuation isn’t always (completely) based in reality (hint: there is a big difference between what a company’s worth in “real money” vs. what it could be worth in an acquisition), consider what’s happening in the Venture Capital (VC) ecosystem. VC investors love to reward growth metrics with higher valuations. So it’s common for startups to shop VC firms looking for the best price. This practice has some experts worried that the VC industry is the next bubble.

However, before we throw our hands up, let’s look at what we know about types of business valuation and what these mean for successful non-unicorns and their investors.

Public vs. Private Company Valuation

One of these things is not like the other.

The first thing to understand about business valuation is that we can’t easily compare the values of publicly and privately held companies. Determining the market value of a company that trades on a stock exchange (e.g., Apple, Tesla, Facebook) is fairly straightforward (though we’ll see below that this method doesn’t take into account all types of value investors might want to consider).

business valuationHowever, for private companies, the process is not as straightforward or transparent. This is because unlike public companies that must adhere to the SEC accounting and reporting standards, private companies do not report their financials publicly and since they aren’t listed on the stock exchange, it’s more difficult to determine a value for a private company.

Public company valuation: generally in the press you see market capitalization (AKA market cap, in slang) used as a valuation description (see: Apple, Tesla).

  • Market cap = stock price x number of outstanding shares
  • Example: Apple shares outstanding: 4,829,926,000 x $219.01 (closing price on 8/27/18) = $1.06T

This is pretty simple, but keep in mind that this doesn’t necessarily take into account the full range of measures used to assess the potential purchase price (aka value or market value or valuation) of a business. One of the most commonly used valuation metrics for a public company is enterprise value.

  • Enterprise value = a corporation’s market cap (see above) plus preferred stock plus outstanding debt minus cash and cash equivalents found on the balance sheet

So, let’s say that you wanted to buy Apple. The enterprise value is the amount it would cost you to buy every single share of a company’s common and preferred stock, plus take over their outstanding debt. You would subtract the cash balance because once you have acquired complete ownership of the company, the cash is yours.

  • Example: Apple’s Enterprise Value

Apple’s market cap: $1.06T + outstanding debt: $114.6B – cash and cash equivalents: $70.97B = 1.1T

Okay, so how do we determine the value of a private company. Here there are several different approaches.

Headline valuation: private company valuation metric generally based on the price paid per share at the latest preferred stock round (i.e., investment round) multiplied by the company’s fully diluted shares (see: Slack).

  • “Fully diluted shares” = Common Shares outstanding + Preferred Shares outstanding + Options outstanding + Warrants outstanding + Restricted Shares (RSUs) + Option Pool (sometimes)

See. It’s complicated. And, also a bit of a black box for the average investor. It infers that all shares were acquired at the same price as the latest round, which isn’t typically the case.

Generally, this type of valuation is used because it’s impressive on paper and in the paper (or on the screen). Keep in mind that this basic formula, while it may seem complicated, avoids a lot of the technicalities of private company valuation (but if you’re interested Scott Kupor of Andreessen Horowitz did a great post on VC valuation here).

Although private companies are not usually accessible to the average investor, there are times when private firms need to raise capital and, as a result, need to sell part ownership in the company. For example, private companies might offer employees the opportunity to purchase stock in the company or seek capital from private equity firms.

In these cases, investors can assess business valuation using another common approach:

Comparable company analysis (CCA): a method of business valuation that involves researching publicly traded companies that most closely resemble the private firm under consideration. Such analysis includes companies in the same industry (ideally a direct competitor) and of similar size, age, and growth rate.

Once an industry group of comparable companies has been established, averages of their valuations will be calculated to establish an estimate for the private company’s value. Also, if the target firm operates in an industry that has seen recent acquisitions, corporate mergers, or IPOs, investors can use the financial information from those transactions to calculate a valuation.

Discounted cash flow (DCF) valuation: similar to the above method, this approach involves researching peer publicly traded companies and estimating an appropriate capital structure to apply to the target firm. From here, by discounting the target’s estimated cash flow, investors can establish a fair value for the private firm. A premium may also be added to the business valuation to compensate investors for taking a chance with the private investment.

Misconceptions About a Company’s Worth

So, what’s your company “worth?” If you’re not running a billion or trillion dollar company, you may be wondering where to start in figuring out your company’s valuation. We discussed the basics of business valuation in a previous blog article, which will give you some answers.

And, of course, you may now be wondering whether to take your company public. Or perhaps you’re thinking about raising money to fund your business. You can find out more in Audacia’s IPO Roadmap series (Part One is here).

Now that you know the basics, let’s bust a few common myths:

Business Valuation Myth #1: Valuation is a search for “objective truth.”

This may be obvious already, but all valuations have some bias built-in. Yes, investors will pick and choose the model or approach they want to use. So if you want to put your company in the best light when raising capital, it’s important to understand your target investors so you can tailor your pitch.

Business Valuation Myth #2: A good valuation provides a precise estimate of value.

In some sense, investors are not that interested in precise value. Think about it. What does the value of a company today tell you? This is a measure of what the company has done in the past. But investors are really interested in what the company will do in the future. So, the current value need not be precise to determine whether the business is a smart investment.

In fact, while this is somewhat dependent on industry, it’s arguable that the ROI is greatest when the business valuation is least precise. This could be one of the lessons learned from analyzing the VC industry in Silicon Valley.

Look at Uber, for instance, the world’s most valuable VC-backed company, with an estimated valuation of $62 billion. It’s burning through cash, losing between $500 million and $1.5 billion per quarter on a run-rate basis since early 2017. Yet the company still raised a $1.25 billion Series G led by SoftBank earlier this year, according to the PitchBook Platform.

Business Valuation Myth #3: The more quantitative the model, the better the valuation.

There are a few different schools of thought here, but often the more numbers contained in the model, the more questions investors will have. The best valuation is the one that makes sense and is clear enough to be pressure tested by investors. So beware of overly complex quantitative models and numbers that need a lot of explaining.

As you can see, business valuation for private companies is full of assumptions, educated guesses, and projections based on industry averages. With the lack of transparency, it’s often difficult for investors and analysts to place a reliable value on privately-held companies. However, this is really not much different from other aspects of business. Whether you’re a business owner considering how to raise capital or an investor looking to take a chance by getting in on the ground floor of the next big dog, business is all about taking calculated risks.

At Audacia Strategies, we love to help companies in all stages. You choose the next calculated risk and we’ll be there to support you in making bold moves confidently. Business valuation is not for the faint of heart. Get the right team on your side!

Photo credit: pressmaster / 123RF Stock Photo

managing through change

Top 5 Tips for Managing Through Change Or What I Learned While Attempting to Surf

There was a time in the not-so-distant past when executives had a simple goal for their organizations: stability. But market transparency, instantaneous communications, labor mobility, and global capital flows have swept this comfortable scenario out to sea. In most industries and in almost all companies—from giants to micro-enterprises—heightened competition from new markets have forced management to concentrate on something they happily avoided in the past: change.

Companies today need to figure out how they can capitalize on uncertainty. Success in this era means managing through change. A solid, static plan just won’t cut it. So rather than trying to plan for the inevitable and manage the change, leaders should turn their attention to managing through change.

What does managing through change look like?

Good question. I was recently thinking about this idea while on vacation—as one does. While it’s tough to come up with a one-size-fits-all methodology that fits every organization, perhaps a metaphor is a useful place to start.

Surfing and Change

My husband is a surfer. While he doesn’t get to surf as much as he’d like in D.C., we often spend vacations on the water. He surfs. I attempt to surf and spend a lot of time watching surfers and thinking about business metaphors.

On a recent trip, while I was bobbing in the ocean waiting for a wave (okay, more honestly, I was trying to catch my breath after falling and paddling back out for the hundredth time), I got to thinking about how surfing is like managing through change.

The best surfers are masters at riding the big waves. They know better than to try to manage the waves (I’m not even sure what that would look like). They don’t spend a lot of time hoping they’ll be able to stand up or planning to use the very best technique to balance on the board. They feel the flow of the ocean way more than they manage or hope or plan.

In broad terms, this is what it’s like to manage through change. Instead of bracing for the bump, skilled leaders accept that rough waters are coming, learn to embrace the change, and engage their entire organizations.

managing through change

Now let’s try to move past mere metaphor, shall we? Rather than offering a single methodology here, what follows is a “Top 5” list of best practices and guiding principles that can be adapted to fit a variety of situations calling for managing through the change.

1. Watch the sets come in.

In surf lingo, “set waves” refers to a group of larger waves. There’s a rhythm to the ocean on any given day or time of day. As you keep an eye on the horizon and watch these sets coming through, you start to get a feel for the rhythm and begin to prepare to catch a ride.

There’s also a rhythm to markets and if you watch the trends, you will get a feel for it. Managing through change means anticipating market trends and developing flexible strategies to prepare your team for what’s coming. In a highly competitive environment, that means going deeper than your competitors. Is there an untapped resource, you’ve had your eye on for some time? Perhaps it’s time to bring in that consultant or find another way to infuse fresh ideas.

In addition to being prepared for market trends, set your expectations. There are times when pulling back and being a bit more conservative is the right move. But this can be a hard pill to swallow, especially for highly competitive leaders and teams. So set the expectation from the outset: choose a date (or other benchmark) by which time to make a decision. Until then, maintain awareness, anticipate what you can, and prepare.

2. Be in position to catch that wave.

Sometimes the waves in business and on the ocean roll in more slowly than you would like. The “hurry up and wait” cycle can get old. So, make sure you are taking advantage of the waiting periods to understand where you are, what the wave (AKA change) looks like, and where you want to be at the end of your ride (i.e., you want to avoid being smashed into the rocks!).

Knowing your goal and having your exit strategy is just as important as riding that big wave as far as it wants to take you. Get in position by creating a game plan that’s flexible enough for your purposes:

  • Define success carefully. Consider the ideal goal, but also what, at a minimum, will count as a win. Be generous.
  • Do your market research. Don’t skimp on this step! Rushing into a big change without doing the right research sets everyone up for failure.
  • Understand your strengths and weaknesses. Transformation affects every level of your organization. Make sure you identify leaders early in the process and give them the tools they need to execute their specific missions. Also, look for any gaps in communication across departments. Strategize about how to create more cooperation.

3. It takes more work than you think to catch that wave.

Paddle harder (or, as my husband says/yells, “paddle, paddle, paddle, paddle!”). Once you know you are in the right position and ready to catch the wave, the real work begins. You have to dig deep and do the work to catch that wave, so you can jump up on that board. Then you have to dig deep again to maintain your balance and ride that wave.

We know all too well that market forces shift. So even if you brilliantly complete the first two steps above, the market can suddenly leave you stranded alone on a deserted island. Alternatively, if those market forces do hold in just the way you were hoping, you’ll likely run into others surfing the same wave. So you need to be ready to adjust to markets shifting AND to competition shifting.

4. Waves don’t always do what you want them to do—be ready to adapt.

Change projects, like big waves, pick up momentum as they build. If you aren’t prepared to adapt, things can get out of control quickly. This means leaders at all levels of the organization must be empowered to rapidly adapt.

Successful startups are often successful because they have mastered the art of managing through change in precisely this way. Their agility gives them a huge advantage over large competitors in a market that rewards adaptability. But even giants can adopt and modify plays from the startup playbook.

For example, what is the status of your innovation pipeline? Is there an effective process for employees at all levels to introduce ideas up the chain? Is the culture such that employees feel motivated, heard, and supported in suggesting innovations?

5. Enjoy the ride and watch the view—you earned it.

In the midst of all this, don’t forget to savor the moment. Even if you only manage to ride the wave for a short time, take pleasure in the fact that it was your hard work that helped you see this new vista. And, appreciate the hard work that it took to get there. Going through the process has given you insights that you can use in the future too.

Finally, get ready to do it all again. Change, like waves, keeps coming.

While the Audacia Strategies team can’t promise to teach you how to surf Banzai Pipeline, we are experts at helping firms of all sizes manage through big waves of business transformation. Hey, we’ll take our inspiration wherever we can get it! If you’re looking for a bold team to help you build your way through change, contact us and let’s set up a consultation.

Photo Credit: IKO / 123RF Stock Photo

investor relations

Investor Relations Starts At Home: 3 Tips for Disclosing Q3 Earnings

This week it seems like everyone in the financial world has been obsessing over companies like Apple and Google releasing their Q3 earnings reports. For analysts, preparing to disclose earnings is one of the biggest challenges of investor relations. Wall Street has been in a holding pattern during the past 30 days. But the perceived wisdom is that if any of these big companies reveals an earnings surprise, it could be just the jolt investors need to bring them out of their malaise. I’d say the jury is still out though.

There is no doubt that quarterly earnings are a crucial measure to watch. Still, as you develop a strategy for communicating your company’s Q3 earnings to investors, consider that finding the right message is as important as the actual data you are communicating. It’s always a good idea to keep things in perspective. Since companies aren’t valued in a vacuum, having situational awareness is essential to communicating the right message to your investors.

In fact, situational awareness is so essential to investor relations that we think it deserves a three-part series of its own. So we’ll start off in this post with tips for helping you view your company from the outside in. We will follow up with posts about knowing your peers and knowing the market.

What is situational awareness and why is it key for your quarterly earnings strategy?

As you might have guessed, there are three main components to situational awareness: knowing yourself, knowing your peers, and knowing the market. Each of these components plays a role in preparing you to discuss your company’s valuation with investors. Investors want you to give them the numbers, but they also want you to help them interpret the numbers. Remember that they are looking to you as an expert on their investment.

This is especially true when it comes to disclosing earnings. Building a successful investor relations strategy is about getting into the minds of your investors. From an investor’s perspective having more information is always preferable to having less, so anything you can do to put those numbers in context will be well received.

Think of it this way. Which is more helpful for investors to know:

  • Your earnings rose 10%?
  • Or your earnings rose 10% while your closest competitor’s earnings rose 8%?

That the second one jumps out as more helpful demonstrates the power of situational awareness. Now, we’re not saying you call out your competitors’ results specifically but you definitely want to note the “industry-leading” results during your earnings call. An investor relations strategy that integrates situational awareness doesn’t simply focus on telling the story of your quarter. It also positions your company relative to how your peers performed and to how the market itself performed, giving your investors a more complete picture of your company’s performance.

So let’s talk strategy.

What does it mean to know yourself?

1. Know your company better than anyone else.

This should go without saying, but no one external to your company should understand your company better than you do. So develop your own models, craft earnings polls, and get into the minds of analysts to understand how they are really evaluating you.

Additionally, rather than making assumptions about what analysts are thinking about your company based on their research, reverse engineer the research whenever possible. Get your sell side analysts’ models and compare and contrast. If it becomes obvious to you that analysts are operating under incorrect assumptions, build some commentary into your earnings call discussion to explain any discrepancies and to give more context for their revised models.

2. Know what the analysts ask.

Examine the questions analysts asked about your company and your peers during the last quarter (or even during the last few quarters). Compare those questions to what they are asking during the current earnings season. For example, if analysts asked about the risks associated with a particular raw material three quarters ago, but haven’t asked since, this might explain discrepancies between your internal reports and the external reports you’re seeing.

Don’t simply assume the questions analysts ask are consistent from quarter to quarter. While it can be tempting to dismiss a lower than expected valuation from analysts on grounds that they don’t have the complete picture, investors will rightly hold you accountable for failing to anticipate and adjust internal models.

3. Know yourself relative to your peers.

This bleeds over into what we’ll talk about in more depth next week, but part of knowing yourself includes knowing how you will handle the release of peer earnings reports. Because many data points are more meaningful in the context of understanding industry trends, keeping tabs on your competition is key to understanding how to position yourself with investors.

For instance, in the defense industry where there has been a mostly flat business landscape for much of the past year, it makes sense for defense contractors to pull back and take a more austere approach to allocating resources. But if you know your competition is taking this approach, while your company is increasing its investment in research and development, for example, you may have a powerful discriminator that sets you apart from your peers. Well communicated and in context, a carefully considered, seemingly contrarian investment strategy could really pay off in potential valuation.

Long story short, if you aren’t keeping tabs on your competition and how they handle macro-issues facing your industry, then you are operating at a serious disadvantage. It’s a little bit like showing up to a tennis match with a ping-pong paddle. Of course, it’s important to work on your backhand, but if you haven’t studied your competition carefully, you risk underestimating them.

Stay tuned for next week’s continuation of this series on situational awareness and investor relations when we’ll discuss knowing your peers on a deeper level. In the meantime, if you would like help communicating a consistent and compelling investment story, we’re always ready to talk disclosure strategy (with as much geeky detail as you can handle, of course). No matter how well you know your company, we understand that it can be challenging to know how to frame your message and to develop the right outreach plan. Contact us today. We’ve got your back!

Photo credit: Wavebreak Media Ltd