| What does strategic value mean as it relates to | | | | One theme that creates strategic value is |
| the sale of a business? To a business buyer it | | | | scalability. Can you take the technology, expertise, |
| means that your company is viewed to have a | | | | processes and procedures and easily translate |
| value beyond the value that the historical financial | | | | that from a small company base to a much larger |
| performance might suggest. A financial buyer will | | | | company. At one extreme you have an owner |
| typically pay between 4 and 6 times EBITDA or | | | | who is the ultimate subject matter expert and all |
| free cash flow. There is no magic here. The | | | | business comes through him. This is not attractive |
| theme is that this formula gives the buyer the | | | | for a buyer. |
| ability to cover the debt service for the loan while | | | | At the positive extreme, the selling company has |
| providing a reasonable return on their equity. If | | | | a well documented procedure manual, a training |
| the acquired company performs at least at the | | | | protocol and a well developed customer |
| same level post acquisition, it is a safe investment. | | | | relationship management system. This can be |
| What would cause a buyer to pay a business | | | | more effectively leveraged by the buying |
| seller any more than a financial multiple? Buyers | | | | company thus setting the stage for driving |
| certainly do not willingly volunteer to pay more. | | | | strategic value. |
| They must be encouraged to do this and that | | | | Sometimes just having a coveted customer base |
| encouragement generally comes in the form of | | | | with barriers to entry can immediately turn a |
| other interested buyers that also recognize | | | | selling company into a strategic target. Doing |
| strategic value. What characteristics of a selling | | | | business with the Federal Government or the |
| company would cause multiple buyers to | | | | Department of Defense can be a great business, |
| seemingly over pay for an acquisition? | | | | but getting on the approved vendor list can take |
| The key is that the selling company has to create | | | | years. |
| potential that can be leveraged by the new | | | | One of our clients had gotten technical approvals |
| owner. Simply by putting the resources, customer | | | | with several telephone companies' and wireless |
| base, brand name, sales force, distribution | | | | companies' headquarters. This did not guarantee |
| system, manufacturing efficiencies, etc. behind the | | | | that the multiple local decision makers would buy |
| acquired assets they can often dramatically | | | | from him. It did, however, provide him a valuable |
| improve the return from those assets. | | | | "hunting license" within these giant companies. |
| One of our clients with the president as the only | | | | Innovation is a powerful driver of strategic value. |
| salesman had only 12 customers. They had a | | | | It is not just limited to software, Internet, Bio |
| complementary product to the eventual buying | | | | Tech, or information technology who are often |
| company's product line. The buying company had | | | | the poster children for some highly publicized |
| 27 sales people and 800 customers that were | | | | generous acquisition multiples. |
| fertile prospects for the newly acquired product. | | | | Innovation can take on many forms including |
| Sales exploded post acquisition. | | | | improvements in manufacturing, distribution, |
| The buying company understood the potential | | | | training, marketing, sales systems, etc. Your |
| that they would be able to unleash and was willing | | | | merger and acquisition advisor's ability to |
| to give our client some credit for this projected | | | | recognize, document and articulate this leveragable |
| success. We did encourage them to take this | | | | intellectual property will go a long way toward |
| enlightened view with the help of their biggest | | | | maximizing your transaction value when you sell |
| competitor who was also interested in the | | | | your company. |
| acquisition. | | | | |