The Art of M&A: Key Value Drives to Realize a Successful and Lucrative Outcome - Part 1

Jonathan Wesner, CFA, Managing Director, Harbor Ridge Capital

About the author: Jonathan has been an M&A advisor since 2011 and has completed over 40 investment banking transactions totaling $1.8 billion. He has extensive experience working with founders and C-level executives, primarily specializing in software.

Introduction

While selling one’s company can seem like a daunting and difficult task, there exists a proven model and framework that drives valuation to maximum achievable levels and leads to deals successfully getting done. This four-part blog post is to help guide companies and entrepreneurs that are contemplating a sale as to what the primary and secondary valuation drivers are in an M&A sale process, summary points as to how a sale process is conducted, and the value that an M&A advisor can add to the proceedings.

Expertise and Experience

Throughout my 10+ year investment banking career, I have successfully advised small to mid-sized companies in over 40 completed investment banking transactions, totaling $1.8 billion. Using this experience as a guide, here I will provide a general road map to the M&A sale process, information on how value is created, and some specific deal examples (certainly not all inclusive!). In short, there is no substitute for seeking advice from, or working with, an expert with deal experience, mainly for two reasons:

1.    The ability to think through the sale process and investment opportunity strategically and to anticipate the main issues and negotiation points is a unique and specialized skillset.

2.    The proven ability to drive valuation higher and to push transactions to completion ultimately leads to converting the value of the business into tangible, liquid wealth.

Primary and Secondary Valuation Drivers

Premium valuation—a valuation well in excess of that of a company’s current valuation (if publicly traded) or in excess of the company’s peer group on a relative basis (if privately held)—is achieved through the combination of the right positioning of the company/investment opportunity and an effective M&A sale process.

The Primary and Secondary Valuation Drivers of a Business in an M&A Process (Figure 1):

The Components of the Positioning of the Business

Properly positioning an acquisition opportunity (company or target) to the investment community (investor) is both science and art (a very common cliché, but true nonetheless!) and comes in a variety of forms and deliverables (i.e., via the management presentation, initial follow-up calls, follow-on dialogue and Q&A with interested investors, management presentations, subsequent deal and legal negotiations, etc.) and is presented and distilled over the course of a number of months.

Initially, the financial advisor will look to learn as much about the business as possible in a relatively short amount of time and ultimately seek to analyze and distill the opportunity into a series of investment highlights that the investor community will find enticing. These investment highlights, along with specific information about the target, will initially be presented to the investor in the form of a management presentation. What these highlights and company information consist of, and how they are presented in the investment presentation vary with each opportunity. In general, they fall into two main buckets and address the following questions:

·       Intrinsic Value: What is the intrinsic or inherent value of the current business based on current operations and growth potential?

·       Strategic Value: What is the incremental value to the investor or acquirer, above and beyond the current intrinsic value?

Components of the Positioning Valuation Drivers (Figure 2):

Stay tuned for Part 2 of this article, where we will dive into the Intrinsic Value portion of positioning.