Recent Published Interview on M&A Strategy Considerations
Whitehawk Advisory Founder Alex Klingelberger Explores M&A Strategy
As an investment banker with extensive experience in representing founder-owned middle market companies, Alex Klingelberger has helped dozens of clients better understand the M&A process in order to sell their businesses in a strategic, advantageous fashion. According to Klingelberger, one of the most important factors that may come into play when selling a business is timing. While timing can refer to the state of the market and the benefits those conditions have on the valuation of a company, it can also refer to the seller’s preparation to market an asset in a way likely to realize the value desired in a transaction.
Alex Klingelberger recognizes that while many entrepreneurs may launch a business with the intent to sell at one point, some may not fully understand the steps that can be taken to prepare to pursue an exit strategy. He states, “The M&A process is a lengthy one that requires months of research, marketing, and negotiations. As such, it is critical that business owners are confident that they are selling a business at the right time and with the opportunity to realize the best financial outcome.”
Those questioning the pros and cons of selling their business are invited to review the following important considerations to make before entering the M&A process:
Understand the Baseline Value
Valuing a business can be an important first step in setting a baseline for a business owner to understand whether a sale transaction has the capability to achieve the wealth creation sufficient to replace income derived from a business. While a valuation analysis does not provide certainty regarding the outcome of an M&A transaction, it should be able to offer an indication regarding the key factors that will affect a potential deal. According to Alex Klingelberger, conducting a valuation analysis several years in advance of an owner’s intended liquidity horizon enables a seller to receive an independent perspective on the present value of the business, identify value drivers, and compare the valuation result to a desired financial outcome. All of these aspects are important inputs to determining whether a business owner is ready to pursue an acquisition.
“Gaining insight into business performance by using an independent valuation is useful not only for transaction planning, but also as a business performance benchmark for companies that have no immediate intent to sell. An increasing number of companies now use stock options or other types of equity compensation to incentivize and retain employees. Valuation analysis is a tool which both owners and employees utilize to frame the discussion of ‘how are we doing?’” describes Alex Klingelberger.
Find the Levers
Alex Klingelberger explains that for most operating companies, there are a limited number of key performance indicators that will largely determine the value of a business in a transaction. The enterprise value of a business is typically determined by the product of a valuation multiple, such as a revenue or EBITDA multiple, and the related financial performance metric for the subject business. Another primary determinant of value is the quality of a Company’s balance sheet. In order to reduce complexity prior to a transaction, sellers often “clean up” their balance sheet by removing related party receivables or payables, spinning out real estate assets or divesting these using a sale-leaseback transaction, and closely examining the value of receivables and depreciated assets. Especially when conducted in conjunction with a financial statement audit, these actions can create substantial value in a deal process and open avenues with specific buyers which otherwise may be hesitant to engage in an acquisition discussion.
Recognizing the value drivers which determine the price and structure of a transaction can be also helpful to a business owner in setting appropriate expectations with partners and investors. Klingelberger notes, “I’ve found that many entrepreneurs are well informed regarding the general factors that affect business valuation across industries, but they are seeking additional detail regarding industry-specific benchmarks and how secondary performance indicators affect the big picture from a transaction standpoint.”
Set Your Exit Threshold
It’s a commonly stated adage in the investment banking world that “everybody has a price.” When stated in this context, bankers are usually referring to the amount of gross proceeds that a business owner requires in order to walk away from their company. For many sellers, this tends to be a round number such as $5 million or $10 million. What is far less common is for the individual articulating this requirement to base “the number” upon a specific set of assumptions derived from the individual’s spending patterns, existing assets, family expectations, age and health.
As such, Alex Klingelberger encourages prospective sellers to fully assess their financial requirements as part of the transaction planning process prior to hiring an investment banker. “I always encourage my clients to work with a personal financial advisor prior to and during the transaction process. To the extent that personal financial planning considerations need to be incorporated into deal structure, it’s imperative to have that information early on before deal terms and negotiating positions become entrenched,” he explains. “Without understanding the seller’s financial requirements, it’s difficult to credibly state whether a specific deal will satisfy his or her intended conclusion.
Alex Klingelberger Highlights the Value of a Growth Plan
Among the most important characteristics of a business from the perspective of a buyer is the propensity for the company to grow, as demonstrated by its recent history and near-term plans. Alex Klingelberger reminds entrepreneurs that it is important to illustrate the viability of the growth plan to prospective buyers. He states, “When putting a business on the market, it is essential to demonstrate that business projections are credible and consistent with a detailed growth plan that management is executing against. Few things undermine seller credibility like a poorly supported, hockey-stick projection.”
Growth is Compared Against Peer Companies
When determining the appropriate level of growth to project for a company, one common question asked by entrepreneurs is “how much growth do investors and buyers expect to see?” Alex Klingelberger explains that the answer to this question depends upon the maturity of a company as well as its business peer group. “Early stage ventures and companies with revenues of less than a few million dollars are expected to have high double-digit or even triple-digit growth rates to be deemed attractive to venture investors and strategic buyers,” states Klingelberger. “On the other hand, companies that are considered to be at operating scale, or which conduct business in relatively low growth industries, can attract interest at more modest growth rates because these assets are being compared primarily against their peer companies.”
Involve Employees in Your Growth Plan
Involving employees in formulating and implementing the Company’s growth plan would seem intuitive to an outside observer, but it’s not unusual when a buyer conducts due diligence to discover that the strategic growth plan articulated by a seller is not more broadly understood by management. This creates a credibility issue during a sale process, as it calls into question the veracity of the seller’s stated strategy for the business. Klingelberger routinely advises clients to represent circumstances in the business as they actually exist. If a seller believes that the circumstances would be viewed unfavorably, then the decision should be to change the state of affairs in advance of approaching the market.
This interview was published in the USA Herald on September 16, 2013 and can be found at http://usaherald.com/alex-klingelberger-m-and-a/
As a valuation professional and investment banker, Alex Klingelberger has provided invaluable advice to his clients for more than a decade. He specializes in providing guidance to business entities on such matters as mergers and acquisitions, expansion capital financing and valuations for tax and financial reporting purposes. His personal dedication to clients, insight into the capital markets, and track record in delivering outstanding financial outcomes have enabled Klingelberger to establish a national client base of emerging growth and middle market technology companies.