M&A Insights – Mark Young, Managing Partner, CKS Advisors
Welcome to the May 2021 edition of M&A Insights. Our goal at CKS Advisors is to help you stay up to date on the Mergers and Acquisitions climate.
This month, we highlight common myths surrounding business valuations of private companies.
Many M&A transactions fall apart due to misaligned valuation expectations from the parties involved. Thus, it is critical to understand the common misconceptions regarding this topic so that you are not blindsided when you start receiving bids for your company.
Common Myths:
- Value of a business is agreed upon by all buyers – Ultimately, the buyers in the market at the time of your transaction determine a company’s true worth. We tell our Client’s that the saying “beauty is in the eye of the beholder” is alive and well in M&A. Our experience tells us most transactions will produce a wide range of values.
- Companies in the same industry are valued the same – Industry averages may be a good starting point to evaluate your business’s value, but the actual value received will likely differ from company to company. Buyers will assess a variety of factors when determining values, with each individual buyer determining the importance of each factor. Just because your competitors received one price for their business does not mean that your company will be treated the same.
- There is only one valuation method – While the predominant valuation method is a multiple of EBITDA, buyers may attempt to use a different method to value your company.
- Value is only based on a company’s most recent financial statements – Buyers evaluate not only your current financial standing but also past results to exam trends and expected future performance when putting a price on your company.
- Running nonbusiness expenses through a company won’t hurt the purchase price – Many sellers reduce taxes now and try to make up for it later by adding back these expenses and presenting Adjusted EBITDA. However, this tactic raises uncertainty for buyers and the lenders that they rely on. It is best to accept the increased taxes in return for a better payoff in the future.
- The more assets I have to sell, the higher the valuation – The value your company receives is based on its ability to generate cash flow. Utilization of assets is a means to produce cash flow, but asset values alone generally do not have an outsized impact when determining a purchase price.
- Valuations won’t vary over a short time period – Like public companies, private businesses experience fluctuations in value. Various internal and external factors could immediately impact your company’s value – for example, the loss/gain of a major customer or COVID.
In Summary:
- We recommend business owners understand, as best they can, the general issues related to valuing a business. But in the end, realize that a buyer will value your company through their lens.
If you would like to learn how we might help you how buyers would assess your company, the M&A market in general, or are ready to take the next step to explore your options, we would be glad to meet. Please contact me at 480-351-8533 or myoung@cksadvisors.com.
This post is for informational purposes only and does not constitute an offer, invitation, solicitation, or recommendation to buy, sell, subscribe for, or issue any securities. While the information provided herein is believed to be accurate and reliable, CKS Advisors, LLC and Ashland Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Certain Principals of CKS Advisors, LLC are registered representatives of Ashland Securities, LLC Member FINRA, SIPC. CKS Advisors, LLC and Ashland Securities, LLC are separate and unaffiliated entities. Securities and Investment Banking Services are offered through Ashland Securities, LLC.
