Tag Archives: middle-market

Have You Sanity-Checked the Valuation Multiple?

I’m talking about the valuation multiple on the company you think you’d like to acquire.

 

Several months back I was talking the owner of a company, one of my client’s acquisition targets, about valuation. The conversation was similar to one I’ve had many times. He felt that his company was worth 7x trailing twelve months operating income, or based on my best estimate, about 5.6x EBITDA which is on the high side for an industry that is seeing similar transactions in the range of 4-5x EBITDA. His rational was that the company, at about $15 million in revenue, was achieving 20% operating margins–he suggested that I go try to make that kind of profit in the stock market. He also indicated that there had been offers in the past that were south of 7x operating income, and he felt he could do better.

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Focus on What Matters Most in Integration

A couple of years ago, before joining Third Coast Capital, I was in the thick of due diligence as Corporate Development Director on a major international acquisition project.  At the same time, I was traveling globally to facilitate strategic planning and trying to juggle other acquisition opportunities.  I had a bandwidth problem, so I hired Larry Radowski from Integrated Project Management Company (IPM) to augment my team.  IPM got up speed quickly and delivered on their expertise.

 

Naturally, when approaching this topic I thought of IPM.  I asked Larry what three things he thought were the most critical in any integration project.  His answer: alignment of the acquisition objectives, tradeoffs between operational efficiency and long-term growth, and application of a consistent, proven management process.  I’d like to explore each of these in more detail below.
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Public Company Multiples: Good Proxy for Value?

Often I find myself discussing valuation with private business owners and many times they will bring up market multiples of their larger, public competitors as a point of reference. Unfortunately, this often provides an unrealistic view of value for their smaller, middle-market business as private companies have an inherent liquidity discount that public companies do not have.

 

Public companies also have the benefit of size and scale which contributes to higher valuation multiples. Other attributes like the ability to buy and sell shares in the open market and raise capital through equity offerings further support these valuation premiums.

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Buying Assets vs. Stock

When buying a business, deciding on how to structure the transaction plays a very important factor for both buyer and seller. Typically, buyers prefer to buy assets and sellers prefer to sell stock. However, since often each party benefits from the opposite structure, it is important to understand the dynamics of each structure as they relate to both buyer and seller.

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5 Tips to Selecting Buy-Side M&A Counsel

There are a myriad articles out there about choosing a sell-side M&A attorney, but very few that address the other side of the deal. Our middle-market acquisition clients and prospective clients run the gamut when it comes to M&A experience. For those that may be newer to M&A, I propose 5 tips to help you choose M&A counsel and ramp your acquisition program.
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Protecting Acquired Intellectual Property

If you are anything like most of my buy-side clients, you typically handle IP diligence internally. This is partially because the middle market companies I work with often acquire businesses with minimal patented IP (though there are always other types of IP in a deal), but it is also due to the potentially high cost of outsourced legal diligence.

 

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