Unlocking the Secrets to a Successful M&A Process: Outlier Valuations, Re-trades, and Other Key Considerations / Part 1 of 2

Navidar | October 26, 2021

Every CEO wants to get the highest possible price for their company. After all, you built your company up through a lot of hard work and innovation. We at Navidar share that goal—we also want you to receive an exceptionally high or “outlier” valuation.

Through the years, we’ve learned that outlier valuations are not a matter of luck; they are earned. This is part one of a two-part post that shares secrets for increasing the likelihood of garnering such a valuation (as well as tips for avoiding an unfortunate re-trade):

Secret #1: The M&A Market Is Inefficient, and Therein Lies a Hidden Opportunity 

Let’s start with a few words about the mergers and acquisitions (M&A) market. As you probably know, the market for companies selling their business is very large. In 2020, the technology M&A market topped $550 billion across a total of 4,800 transactions.

But the M&A market has another amazing characteristic besides its large size: The prices that multiple buyers are willing to pay for the exact same company frequently vary, often dramatically. In other words, to one buyer your company may be worth very little, to another a middling amount, but to a third buyer your company may be extremely valuable. Capitalizing on this characteristic of the M&A market is both the challenge and the opportunity facing companies today.

Our clients have experienced this phenomenon when they receive a broad range of significantly different bids for their company. It really is not at all unusual for there to be a very wide range of values offered for companies that we are selling as this is a direct reflection of the nature of the M&A market itself. In our opinion, the most useful way to make the imperfection of the M&A market work for you—rather than against you—is to hire an experienced investment banking partner who can help you navigate the path to selling your company.

Secret #2: Your Story Is Important and It Should Change When You Sell Your Company

There is a direct correlation between a great story and a great offer. The more compelling you can make your company to a buyer, the more likely you are to receive an outlier valuation.

What do we mean by story? This is the narrative your banker tells potential buyers about your company. It’s your collection of assets, attributes, and capabilities, along with a broad vision of how your company can enhance a potential acquirer’s market position.

Most companies are very good at telling their stories to their customers and employees, but they have considerably less skill at telling their story to potential buyers. But that’s okay; it’s your investment banker’s job to translate your customer-focused story into one that will appeal to a broad range of potential buyers.

Translating the key attributes of your story into a language that will resonate with potential buyers is virtually always a key ingredient to getting an outlier valuation because it not only positions you in the best light possible, but it also expands the pool of buyers that are interested in purchasing your company. An example makes the point most clearly:

Navidar had a client whose CEO was a bit uncomfortable with our enhanced vision for his company. At the time, while his company did have clients in other industries, most of its revenue came from just one industry. He asked us, “Is it really a good idea to say our solution can also be used in other industries?”

We assured him that not only was it a very good idea, but that it would also result in an expanded pool of offers from interested buyers. Ultimately, the purchaser that acquired his company at an outlier valuation did in fact come from outside the industry that had accounted for most of our client’s revenues. The buyer was motivated to purchase our client precisely because our client’s solution could be applied to many different industries.

At Navidar, we see one of our core functions as translating our clients’ assets into points that buyers will value while simultaneously showing buyers how our clients can be leveraged post-acquisition to pursue a bigger opportunity than they could have pursued without them. Recrafting your story is one of the best ways to broaden your group of potential buyers and give you the best chance of achieving an outlier valuation.

Secret #3: You Probably Have Hidden Assets that Will Attract an Outlier Valuation

Clients often ask us how we know how the various potential buyers might value their company. This is clearly the “art” of investment banking, and it comes from decades of experience. One of the most important things we do is work with the company (and perhaps select board members) to dissect the company to discover all of its “assets.” Every company has obvious assets—customers, market share, intellectual property, and its development team, for instance. However, finding the less obvious ones and promoting them is often the key to a higher valuation.

Some examples of these hidden company assets could include:

– Ecommerce marketing DNA, meaning a deep knowledge and skillset in how best to run online marketing programs for consumer products.

– Deep industry domain expertise about the customers’ business workflow that is embedded in the software product it sells.

– A culture that can adopt and capitalize on changing technology trends over long time periods, therefore creating a reputation as a thought leader in the space.

– A unique database and data collection engine for gathering supply chain information on businesses that reflect diversity and sustainability requirements.

The next step in the process is to link as many of these assets as possible to each prospective buyer. In this respect, we don’t just tell potential buyers your story, we tie your specific assets to each prospective buyer’s business so they can clearly identify the potential benefits and synergies. The more “hooks” we can find to drive buyer interest, the greater the opportunity for realizing an outlier valuation.

In part two of this post, we offer three more secrets of a successful M&A process, as well as tips for avoiding the dreaded but all-too-common “re-trade.”

If you would like to discuss any of the advice provided above, or if you are currently seeking counsel on a potential M&A transaction, please contact Stephen Day at [email protected] or (512)765-6973.