Valuation Multiples and Selling your Business

Valuation Multiples and Selling your Business

Valuation multiples can serve as a starting point for estimating the value of your company. The valuation process, when utilizing multiples, is simple: by multiplying a financial metric such as EBITDA by an appropriate multiple, you arrive at a rough estimate for the enterprise value of your company.

So, you ask yourself, I know my company’s EBITDA, but how do I assign the correct multiple so that I calculate a fair enterprise value? The rote calculation of EBITDA*multiple is simple; however, assigning the “right” multiple is an art.

Generally, certain industries have a typical range of multiples for companies that exist in that space. A simple Google search will present websites that claim to provide “valuation multiples by industry.” But if you want to hone in on a more accurate multiple, you are encouraged to do more in-depth research. Organize a list of publicly traded companies that have a similar financial and business make-up to the company you wish to value (i.e., they operate in the same industry and have other similarities). Next, compile a range of trading multiples for these companies by dividing their enterprise value (“EV”) by a financial metric like EBITDA (EV/EBITDA, EV/REV, etc.). With certain adjustments, e.g., including the smaller size of your company versus the public company, which decreases the multiple, this range of multiples should provide you reasonable guidance. Next, multiply the EBITDA of your company by this range and you will have calculated a valuation range for your business. However, this process (called “comparable companies analysis) may be unreliable because it is based upon today’s market prices, which may be volatile. It may also be inaccurate as many adjustments need to be made to the multiple. For example, if your company has high customer concentration or a union, it's likely that your multiple will be penalized versus other companies in your industry.

Another way to calculate a multiple range is to look for comparable companies that have recently been purchased via M&A transactions . If you can attain the purchase price for a similar company, as well as its relevant financial metric (revenue, EBITDA, etc.), you can calculate its multiple. This is actually a more valid multiple range, provided the data is current. However, this process of “precedent transactions analysis” can be inaccurate because some strategic buyers place a high “purchase premium” when acquiring certain companies, which results in a valuation far above fair market price. In addition, economic conditions may have changed since the time of the previous purchases, so that the multiple range might reflect different market conditions.

The valuation derived from these methods serves as a starting point when discussing company value with your M&A advisor. However, it is just that-- a starting point. It is important to remember that valuation multiples are based on comparisons to similar businesses, yet no two companies are the same. Your company may operate in the same industry and provide a similar service/product as another company, but there are certain unique characteristics of your business that may result in a higher or lower multiple than expected. For example, Company A has similar EBITDA to Company B in the same industry. However, Company A commands a higher valuation because it is deemed a higher quality business due to superior management, branding or other reasons.

There is a fundamental flaw in the structure of the multiple. The denominator represents a financial metric-- such as EBITDA. However, EBITDA is an imperfect proxy for free cash flow because true free cash flow includes taxes, working capital, and capital expenditures while EBITDA does not. And free cash flow truly drives the value of a business. Thus, buyers will often stray from the simplistic EBITDA*multiple valuation that the business owner expects to receive because buyers base their bid on true free cash flow generation and other important factors. Therefore, a business owner should not be surprised if the initial valuation projection via a multiple is too high (or too low). Valuation is truly an art, and an M&A advisor like the Versailles Group can perform an in-depth financial analysis to help a seller target a fair, but full valuation for his or her business. Furthermore, marketing the company properly will find the best possible buyers, which will always result in the best possible valuation.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. As one of the leading middle market investment banking firms in Boston, the firm’s focus is obtaining superior results for its clients. That’s the primary reason why Versailles Group has done more repeat business than any other middle market firm. The net result for our clients is a superior transaction, whether it is on the buy or sell-side.

If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

When To Sell Your Business

When To Sell Your Business

One of the most important questions in M&A is: When To Sell Your Business?

M&A in the middle market is stronger than it has been in years. Now that the domestic economy is gaining traction, an increasing number of companies are becoming interested in making acquisitions. As a result of this robust demand, valuations have been driven higher in nearly every sector.

Despite these higher valuations, sellers continue to show hesitation when it comes to the sale of their companies. As shown in the chart below, only 9% of mid-sized companies in 2015 are currently involved in a sales transaction, while another 6% are also actively seeking to be sold. These figures have shown little change from 2014, when 6% of companies were being acquired and another 6% were seeking opportunities. In summary, companies are still hesitant to put themselves up for sale, despite strong demand for acquisitions and attractive valuations.

Right now, some of these companies may be unwilling to sell because they suspect that demand and valuations will reach even greater heights in the future. Yet timing the market is always difficult. M&A conditions in the middle market are currently very favorable for sellers and it is difficult to speculate how long these conditions will last. A decrease in demand from buyers or an increase in the number of sellers could reduce valuations as demand falls and supply increases. For sellers trying to receive the most consideration for their companies, the key is to be ahead of this shift.

To answer the question when to sell your business, the time is now. The market is strong, the multiples are high, and buyers are plentiful.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. As one of the leading middle market investment banking firms in Boston, the firm’s focus is obtaining superior results for its clients. That’s the primary reason why Versailles Group has done more repeat business than any other middle market firm. The net result for our clients is a superior transaction, whether it is on the buy or sell-side.

If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

The Benefits of M&A From a Buyer’s Perspective

The Benefits of M&A From a Buyer’s Perspective

For those of you looking to sell your company, the benefits of mergers and acquisitions are probably already obvious: you want to retire or do something new, and now you’re looking for a big cash payout. If you’re a prospective buyer, however, the advantages of M&A may be less than immediately apparent. Why should you ever buy another company? What good can that really do you? These are the types of questions we intend to answer in this blog.

Buying For Growth

Buying another company is most beneficial when the acquisition is part of a larger “growth strategy.” While it is always possible to spur growth organically by building and developing new operational capabilities, this path will requires millions of dollars spent on new product development, countless rounds of hiring the appropriate staff, and many years of hard work. In the meantime, your company may already have been leapfrogged by its competitors.
In summary, M&A can spur growth for buyers in the following ways:

Expanding your product line and markets

While developing new products and entering new markets on your own is feasible, inevitably, it will be an expensive and time-consuming process. Additional people need to be hired, new research and development will needs to be done, and fixed assets may need to be purchased. In the meantime, you may lose your footing to a faster-moving competitor. In contrast, acquiring another company’s existing product line in bulk can be a surefire way to stay ahead of the competition.

Achieving synergy

In the context of M&A, “synergy” describes how a successful acquisition can create a new company that’s more valuable than the original buyer and seller combined, e.g., 2+2=5. In other words, becoming bigger makes your company more efficient. If your company purchases another company, the new combined entity will have greater purchasing power, better access to technology, lower borrowing costs, etc. The combined firm, if done properly should have less corporate overhead as the new entity only needs one accounting department, one HR group, etc. to run both firms.

Gaining market share

You can also use M&A to outgrow or eliminate competitors in your industry, both directly and indirectly. Organically developing your own business to keep up with competitors is a messy and difficult process, but a strategic acquisition will immediately remove at least one competitor from the field. In addition, making a synergistic acquisition will make your company larger and more efficient than your remaining competitors.

Conclusion

The benefits of M&A from a buyer’s perspective are achievable; however, if one is serious about pursuing this avenue, it is highly advisable to retain the services of a responsible M&A advisor who can guide you through the process to a successful conclusion.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. The net result is a superior transaction, whether it is on the buy or sell-side.
If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

(Photo by Don Grava)

Selling your business fast: Know the risks

Selling your business fast: Know the risks

There are many legitimate reasons for wanting to sell a business quickly, for example, health issues, tax considerations, and macroeconomic concerns (e.g., the fear of an economic bubble, changes in technology, etc.). The impetus to sell also becomes greater if a company has serious operational issues that would continuously reduce the company’s value, unless management sells out quickly. However, even when time is of the essence, it is important to always keep the goal of the transaction on mind. For a seller, the mergers and acquisitions (M&A) process has one overarching aim: to maximize value and to get the seller the best possible terms. If one focuses too much on speed, they risk losing sight of this primary objective.

Although the desire to quickly sell a business is understandable, haste in the M&A process carries its fair share of risks. The most direct downside to speeding up a sale is that you will probably have to sell your company at a lower price. Finding and approaching interested parties is a delicate and time-consuming procedure; by rushing through a transaction, you risk passing over more synergistic buyers. For instance, in a normal transaction, you might be courting one regional buyer for several weeks, before you discover that a second buyer across the country would actually be willing to pay you 30% more for your company because it fits within their own market expansion strategy. If you were trying to sell your company “fast,” however, you would have a far smaller chance of ever discovering this second buyer.

The other problem with a “fast” sale is that it sometimes spooks the buyers. They wonder about what’s wrong with the business when an owner wants a very quick exit. Like a lot of things in life, one needs to maintain some balance to the process.

This is where a boutique investment bank like Versailles Group comes in. Over the years, we’ve accumulated hundreds of contacts throughout multiple industries; if you need to sell your business fast, we can approach all of the appropriate contacts and prospective buyers simultaneously, ensuring that you can still get the highest valuation possible for your company via a competitive auction. Versailles Group will also ensure that your company can effectively assemble the necessary paperwork, including NDAs (Non-Disclosure Agreements) for prospective buyers, so that documentation will not hinder the speed of the selling process. As a boutique investment bank with nearly 30 years of M&A experience, our goal is to maximize value for all of our clients, regardless of how quickly the transaction needs to be performed.

Versailles Group is a Boston-based boutique investment bank. For over 28 years, Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

For more information, please contact

Donald Grava
617-449-3325

Why Versailles Group Recommends M&A Versus an IPO

Why Versailles Group Recommends M&A Versus an IPO

A business owner seeking to take advantage of his or her company’s value will often consider two options for cashing out—an M&A event or an IPO. Before commencing either process, the business owner should weigh the relative pros and cons of both options as they pertain to his or her goals. An IPO is a financing event that recapitalizes the company, while a company sale is a liquidity event. Thus, owners who truly intend on cashing out of their business would be well advised to pursue the sale of their company as opposed to an IPO.

Selling a company has less regulatory complexities and an accelerated timeline when compared with an IPO. An investment bank can help the company find the right buyer and structure the deal in the owner’s favor. For example, if the business owner is keen on receiving immediate compensation in the form of cash from a buyer, the M&A advisor can structure the deal in this fashion. In this way, a business owner can cut ties with the company upon closing a deal. On the other hand, the business owner can be awarded stock in the new company if he or she would like a continued interest in the success of the newly merged company. An M&A event provides flexibility with regard to the business owner’s future. Most importantly, however, M&A can be less costly and achieved more quickly than an IPO.

In contrast, an IPO fundamentally transforms a company from a private entity to a public one. There are numerous downsides and costs associated with this process of going public. First, there are some direct fees to execute an IPO: underwriter, legal, accounting, printing, and roadshow costs. Furthermore, the business owner is often required to retain his or her shares in the newly public company for a certain amount of time, referred to as a “lock-up period.” This precludes the owner from cashing out of the business right when the IPO is completed.

Following the IPO, the company incurs additional expenses to comply with the stiffer rules and regulations of a public company. For example, newly public companies often need to add employees to meet SEC financial reporting regulations and to comply with Sarbanes-Oxley. In short, an IPO requires more planning, preparation, and expenses than a company sale. Thus, a business owner can most effectively and efficiently cash-out of his or her business through a sales transaction rather as opposed to an IPO. Furthermore, once the business owner cashes out, he or she can diversify their investments. This is certainly not possible with an IPO where the business owner is, essentially, trading private shares for public shares.

Thus, to answer why Versailles Group recommends M&A versus an IPO, it’s relatively simple to see the advantages of a company sale over an IPO. Perhaps, the one big exception is where the owner sees tremendous growth and is willing to “suffer” a huge amount of dilution because the company is going to “explode.” The downside, of course, is that once a company is public, there is a large amount of pressure, every quarter, to show increasing revenues and profits.

Versailles Group is a Boston-based boutique investment bank. For over 28 years, Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

For more information, please contact
Donald Grava

617-449-3325

Should you sell your family business? How to decide.

Should you sell your family business? How to decide.

In our previous blog, we outlined some important reasons why entrepreneurs should consider selling their businesses (http://www.versaillesgroup.com/ma-deals-when-should-i-sell-my-business/). However, the decision to sell can be complicated by family considerations. Selling a family-owned business can be a difficult process for some, as these businesses often represent the culmination of years or even generations of hard work.

While many entrepreneurs aspire to pass on the family business to their children, doing so may not always be a feasible option. Under these circumstances, you should consider the possible sale of the business as it can provide you and your family with many benefits. Selling a company usually results in a large cash payout, which allows you to pay for your children’s college educations, enables you to retire, and provides financial security for your family. The financial security should not be underestimated. Most business owners have a majority of their net worth tied up in their business. A sale of the company provides them with an opportunity to diversify.

In summary, you should consider selling the family business if:

• No clear successor in the family: If you do not believe any of your children or immediate kin are qualified to run the family business, then selling may actually be the best way to secure their future. In some cases, your children do not have an interest in the family business and would like to explore different opportunities. In other cases, your children may lack the appropriate skills to properly manage the company. Either way, if these succession issues are not addressed, they can damage the value of the business and financial security of the family.

• The business is causing strain among family members: If managing the business is causing strains on family relationships, then selling the business outright may be your best option. A family business cannot run properly if personal relationships are distracting management. Under these conditions, it may be better to sell the company in order to reward the family with a large payout that will allow family members to pursue new ventures.

• You want to instill entrepreneurial values within your own children: As an entrepreneur, you may wish your children to experience the same discovery process that you did when you were building your business. However, passing on your family-owned company as inheritance may actually inhibit the development of these values within your children by depriving them of the opportunity to forge their own paths through life. By selling the business, you can secure your finances for retirement, preserve the legacy of your business if it is acquired by an experienced operator, and provide your children with the capital they will need to develop their own entrepreneurial pursuits.

For more information, please contact

Donald Grava

617-449-3325

The Problem With Business Value Calculators (And Why You Should Hire An Investment Bank Instead)

The Problem With Business Value Calculators (And Why You Should Hire An Investment Bank Instead)

If you’re a business owner interested in selling your company, it’s likely you’ll be tempted to use online tools such as Business Value Calculators to help you figure out where to start. However, using these business value calculators can often be risky - these tools frequently provide misleading or outright inaccurate data that can seriously jeopardize your prospects for a successful sale.

The issues with business value calculators are numerous. At their essence, they lack the complexity of real life. In an actual M&A transaction, the final price that a seller receives depends on a multitude of multifaceted factors, including (but not limited to) the sellers financial statements, the condition of the seller’s company, industry conditions, macroeconomic market conditions, and perhaps most significantly, the preferences of the buyer.

As the adage goes, “garbage in, garbage out.” Business value calculators are designed to be quick and easy tools that anybody can use, meaning that they avoid complex and difficult data. But without sophisticated data, these calculators can’t give you sophisticated results. Instead, most calculators simply ask for your company’s industry and its EBITDA (earnings before interest, taxes, depreciation, and amortization. (EBITDA is, oftentimes, used as an approximation of cash flow.) With that minimal data, the business value calculator quickly makes an educated guess based on industry averages. Unfortunately, this method is only accurate if you happen to be selling the most average firm in the world, to the most average buyer in the world, during the most average economic conditions in world history. Therefore, in almost all cases, the results of business value calculators will only mislead you either into a false sense of security due to overvaluation, or into a false sense of defeat due to undervaluation.

To be fair, business value calculators can be useful if you run a particularly small business (e.g., less than US$5 million in annual revenue), where minor differences in valuation are just that, minor. If your business is larger, a minor undervaluation could mean that you’ll lose a million or more dollars. In fact, it’s exactly in these sorts of situations that you may want to consider hiring an M&A advisory firm. Even for small business owners, representation by a boutique investment bank means that you’ll receive an accurate valuation for your company, and therefore be in the strongest possible position when price negotiations begin with potential buyers. The investment bank will also know how to push the valuation to its maximum.

Versailles Group is a Boston-based boutique investment bank. For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

For more information, please contact

Donald Grava

How To Sell A Business For Maximum Value

How To Sell A Business For Maximum Value

Every business owner wants to know how to sell a business for maximum value. Perhaps the first step is to understand the most important metric that a buyer will use in valuing your company.

All entrepreneurs interested in selling their company will hear the acronym “EBITDA” (short for “earnings before interest, taxes, depreciation, and amortization”) being tossed around. EBITDA is a popular valuation metric that is usually calculated to approximate a company’s “free cash flow.” To find your company’s EBITDA, all you need to do is take its net income, then add back interest, taxes, depreciation, and amortization.

If you’re selling your company, however, you should be wary about over-relying on EBITDA calculations to determine the value of your company. While popular multiples such as Enterprise Value divided by EBITDA can provide basic insights into the relative value of your company, at the end of the day, such multiples are never the be-all, end-all of valuation.

The EBITDA metric itself has many shortcomings and limitations. Sophisticated buyers are acutely aware of these issues and it’s the major reason why entrepreneurs sometimes have trouble understanding why a professional buyer will place a lower value on their company than the simple EBITDA times a multiple that the entrepreneur used.
Professional or sophisticated buyers prefer to value a company based off its true free cash flow, which represents the amount of cash a company produces that is immediately available to shareholders and debtholders.

While EBITDA is often compared to “free cash flow,” in reality, the two metrics are actually calculated somewhat differently (both are based on EBIT, or earnings before interest and taxes). To recap,

EBITDA = EBIT + Depreciation + Amortization

whereas,

Free Cash Flow = EBIT * (1 – tax rate) + Depreciation + Amortization – Changes in Working Capital – Capital Expenditures

As you will note, there are three main differences between the metrics: Free Cash Flow includes
Taxes
Changes in working capital
Capital Expenditures

Taxes, working capital, and capital expenditures are important to the well-being of a company, yet EBITDA completely ignores these items. This is the fundamental problem. EBITDA is only an accounting metric, which cannot accurately represent how much free cash flow your company actually produces. And, it’s true free cash flow that drives the value for your company. Sophisticated or professional buyers aren’t seeking a return on their investment in EBITDA, they want it in cash or free cash flow.

Thus, an entrepreneur that is interested to sell a business for maximum value should recognize the difference between EBITDA and true free cash flow. For many businesses, these two numbers are completely different.

For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.
For more information, please contact

Donald Grava, Founder and President

Consumer Products M&A Update

With regard to consumer products multiples, it’s interesting to observe the differences in valuations between the various segments. Whether the metric is enterprise value divided by last twelve month’s revenue (“LTM”) or enterprise value divided by last twelve months EBITDA, Food and Beverage commands the highest multiples. (We explain why below.)
Gift & Home Décor seems to garner the lowest valuations in this sector. But, “low” doesn’t mean bad in this case. A multiple of 9.6 times EBITDA is very respectable for this niche.

Consumer Products M&A Update

Consumer Products M&A Update

In the consumer space, strategic acquisitions are a relatively quick way for buyers to keep pace with emerging consumer trends. For example, there are a number of soft drink companies that have acquired water companies, sports and energy drink companies, etc. The purpose of these acquisitions was to respond, very quickly, to customer demand. This heightened demand and competition for companies in this niche translates into higher multiples and values as depicted in the charts above.

Since 1987, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

If you would like to discuss strategic options, please contact me.

Donald Grava

How to obtain maximum value when selling

How to obtain maximum value when selling

The Seller’s Perspective: Is Cash Really King?
If you’re selling your company, one of the most important things to consider is the method of payment. Will you receive cash, debt, stock, or other consideration? That is, literally, the multimillion dollar question.

Most business owners prefer to receive cash, at least initially. As they say, “cash is king.” It’s simple, easy, and it gives owners a sense of closure that no other alternative can offer. Yet in many transactions, cash isn’t always a feasible option, or even necessarily the best option. Instead, business owners should always consider legitimate alternatives to cash, such as debt, stock, and contingent payments. The seller, with his M&A advisor should weigh the respective pros and cons of each appropriately. Below is a brief overview of these options:

Cash
Sometimes, an all-cash payment will make the most sense for the seller. If you don’t trust in your buyer’s long-term stability, solubility or ability to run the merged company then “taking the cash and running” may really be your best bet, regardless of whether or not the buyer offers you a better deal. Nobody wants to be paid in debt, stock or other contingent payments when all it gives you is a stake in a “sinking ship.”

Getting paid in cash is also a good idea if you’re in a hurry to completely divest from your current company or industry. Cash can offer you a fresh start and an ability to diversify your wealth. This would not be true of a stock, debt, or contingent payment deal.

Sometimes, the decision to choose cash as payment isn’t necessarily so simple. If the economy is weak, it may be difficult for the buyer to generate cash. And even in a good economy, a buyer still might give you a better deal if you accept some part of the consideration in debt, stock, or other contingent payments.

Alternative #1: Debt
If your buyer has good credit and you can get a higher valuation, you should strongly consider accepting some debt (usually in the form of promissory notes) as payment. This may also enable a buyer that you’d like to work with in the future to complete a transaction even though they didn’t have enough cash to close the transaction. If the credit is good, then even with debt, you’ll eventually be paid the same amount in the end—or possibly even more, depending on the interest rate. In some cases, you may actually find that buyers are willing to pay more for your company if you’ll accept debt. When it’s easier for buyers to finance, after all, it’s also easier for buyers to pay a higher price.

Of course, debt carries its fair share of disadvantages. For starters, it’s riskier than cash, since you’ll likely be counted as a subordinated lender. That means that if your buyer goes bankrupt, you’ll only be able to reclaim your money after other, more “senior” lenders have already taken their share. And unlike cash, you won’t be receiving all of your money up front, since the debt will be only paid off over time, usually two to five years.

Alternative #2: Stock
In other instances, the buyer may offer you their stock as payment. Frequently, this is offered in addition to cash or debt. Buyers often do this when they want to keep you involved with your company, even after you sell it. If you trust the long-term prospects of your buyer, accepting a stock payment can very easily become the most lucrative option of all. You can often receive a better deal from buyers if you accept stock instead of cash, and unlike debt, the theoretical rate of return on a stock is limitless. Many times, a seller makes a very hefty return on future increases in the stock price.

Obviously, this option isn’t ideal for those who want to make a clean break from their businesses and retire from the industry altogether. Stock is also riskier than cash or even debt. If the buyer goes bankrupt, stockholders are the very last in line to get their money back.

Alternative #3: Convertible (Debt) Securities
Convertible debt securities aim to combine many of the upsides of debt and stock payments, with none of the downsides. Essentially, a convertible debt security is a piece of debt (often a bond) that can be optionally be converted into a stock at a given “conversion price.” If you don’t want to choose between debt payments or stock payments when selling your company, payment via convertible debt securities may be a good solution. You receive the aforementioned benefits of debt, including regular interest payments and more bankruptcy protection, while also gaining the benefits of stock, such as the ability to share in the buyer’s future profits (if you convert your security).

Nevertheless, convertible securities are not without disadvantages. They tend to offer lower interest rates than regular debt, and their conversion price is usually set well above the current market price of the buyer’s stock at the time of transaction. To summarize, if you’re lucky, compared to stock, convertible securities will give you equivalent returns with lower risk. If you’re unlucky, then compared to debt, convertible securities will give you lower returns with equivalent risk.

Alternative #4: Contingent Payments
The most common contingent payment is the traditional earnout. Essentially, the seller will pay these amounts based on the future performance of the company. Most of the time, these arrangements are for relatively short periods of time, i.e., 12 to 36 months. This form of payment works best when the seller stays with the business and has an ability to influence the outcome.

There are as many forms of other types of contingent payments as people have the imagination to think them up. Versailles Group was involved in a transaction where part of the seller’s consideration was an annual payment of $1 million for the rest of his life. Provided that the seller, his investment banker, and lawyer analyze these alternatives thoroughly, they can be very rewarding for the seller.

Conclusion
At Versailles Group, we strive to keep our clients fully informed of all possible options during an M&A transaction, especially on the all-important matter of payment methods. That’s how to maximize value when selling.

As a boutique investment bank, our best interest is served when our client’s best interest is protected. Since 1987, this fundamental value has constantly reaffirmed Versailles Group’s position as a leading M&A advisor to middle market companies around the world. If you’re interested in selling or buying a business, please contact us for a free consultation.

Why Hire an Investment Banker for Acquisitions

Why Hire an Investment Banker for Acquisitions

When acquiring other companies, corporations usually have many resources at their disposal, for example they can utilize their corporate development team, finance department, in-house counsel, etc. Consequently, management may feel that hiring an investment banker is an unnecessary expense. This is particularly true if management is not able to see the true value that a banker brings to the acquisition process.

The following are some of the value added features that an investment banker would bring to the process of completing a successful acquisition or answer the simple question: why hire an investment banker for acquisitions.

Appearance of Neutrality

When attempting to purchase another company, especially a competitor in the same industry, corporations face the challenge of appearing as genuinely interested. Many times, when an acquirer contacts a target in the same industry, they are seen as a competitor attempting to obtain sensitive information. An investment banker plays an important role in breaking down this barrier. Even though the banker is working for the acquirer, there is an appearance of neutrality. Consequently, target companies feel more comfortable dealing with an investment banker, particularly because they know he or she knows how to handle confidential information.

Target companies also feel that an acquirer that has hired an investment banker is truly serious as the buyer has made a commitment of time and money with regard to the investment banker’s participation in the transaction. Conversely, buyers without representation appear as less serious or only interested in obtaining confidential information.

Better Relationships Post Closing

The buy-side investment banker plays a critical role when representing the buyer. He or she can negotiate aggressively on the buyer’s behalf. After the transaction is closed, the buyer and seller can work together as they were not the ones fighting over value and terms. If these two parties had negotiated fiercely with one another during the merger, relations post-closing will be strained.

Thus, by utilizing an investment banker, the acquirer’s relationship with the target will be better post-closing. This is another critical role that an investment banker plays as the future success of an acquisition is dependent on the smooth integration of management teams post-closing, particularly if there are any contingent payments.

Objectivity

During the M&A process, it is invaluable to have a resource that can provide an objective opinion on the best acquisition strategy, valuation, and other matters. Corporations, even those with large staffs, may not be able to examine the full ramifications of an acquisition target post-closing. An experienced investment banker can help the buyer gain the perspective that is needed to complete a successful acquisition. This assessment covers the gambit of strategic, tactical, valuation, terms, negotiating tactics, structure, etc. Only an independent investment banker will be able to provide an objective third party view to a buyer.

Conclusion

There are many reasons why an investment banker can add real value to the acquisition process. They add an aura of neutrality, better relationships for buyer and seller post-closing, objectivity, and expertise with all of the moving parts that make up an acquisition transaction. This should answer the important question of why hire an investment banker for acquisitions.