MERGERS & ACQUISITIONS

Finding the Perfect Partner – Part One: Analysis and Valuation
The typical five-to-eight month process of selling a company, or divesting a part of its business, can be divided into roughly four components: analysis and valuation; identification of potential partners; contacting potential partners and executing the deal.
In part one of our series we focus on analysis and valuation. We take the perspective of a company on the sell-side, but our discussion should be equally informative for any business that finds itself on the buy-side.

by Hanna Tikkanen Merk

Getting Started: What is unique about your company?
The purpose of this initial step is to get a clear picture of the unique strengths and weaknesses of the company in order to determine its potential value to a future partner. While general industry trends and expectations will be a part of the buyer’s evaluation process, the selling company should focus on clearly describing the unique characteristics of its products, processes, assets (particularly the intangible ones), and its particular selling points, organization and strategy.

What do you need to grow?
After analyzing where you are today, you need to develop a clear idea of what your company needs to succeed beyond its current trajectory. For example, your company might need access to an international partner’s sales network to grow sales volume. Or, you may want to share part of the manufacturing platform to reduce the unit cost of production. One common question potential buyers is: how would the company use additional working capital if it were made available? The seller should have a thoughtful answer to this question prioritizing the 1-2-3 areas of its business that would provide the best return for such an investment.

Be honest, but not too modest
During this first phase it is of paramount importance that management thinks outside the box. For you, your patent churning R&D division may be expensive, and lack sales to carry its weight, but for someone else it may be a great but currently underutilized opportunity. European companies in particular tend to be overly modest in describing their achievements, which is a grave mistake. This is the time to let it shine, and let the buyer make the judgment about what your crown jewels are worth to them, given their own capabilities.

The value is in the eye of the beholder
There are a myriad of commonly used company valuation techniques, and every self-respecting MBA will readily quote you the latest and greatest. However, if there were a fool-proof single value that could be assigned to a company based on its “numbers” alone then why doesn’t every potential partner offer you the same price? The answer is that your value to a company has almost as much to do with its unique characteristics as it has with yours. If the potential target happens to have exactly what is needed to make your business take off, then clearly they are willing to invest more than, let’s say, a purely financial investor would who is valuing your company as a pure speculative play. It is important that you have a minimum price in mind by the end of this first step: the price at which you would be willing to consider parting with the ownership of the shares. At the same time, the better you manage this stage, the higher the likelihood that your actual selling price will be significantly higher.

In upcoming issues we will discuss how to identify the potential partner candidates to whom your company would be worth the most; how to contact potential partners and the best way to execute the deal.

Hanna Tikkanen Merk is Director of Sales and Divestitures at Gammer Group International