Importance of Due Diligence

Importance of Due Diligence

Due diligence is a critical part of any deal. However, this is not just a time for the buyer to research the seller.  It is equally important that the seller research the buyer.  If a deal falls through because of problems with the buyer performing, e.g., a lack of funding, the seller will have wasted both time and money.

Typically, due diligence is performed after a Letter of Intent (“LOI”) has been executed by both buyer and seller.  This process usually takes 30-60 days or sometimes longer if there are complicating factors.  This is a time for the buyer to ensure that the company they are buying meets the standards the seller claims it does, i.e., that it matches what is stated in the selling memorandum and subsequent management meeting(s).  If the information does not match, the buyer may negotiate a lower price, attach extra conditions to the sale, or pull out altogether.

It is in the seller’s best interest to ensure that due diligence is completed as soon as possible. Delays extend the transaction and could ruin the deal entirely.  Therefore, it is important to answer promptly any information requests from the buyer.  It is usually helpful to give the buyer access to the company’s CPA firm and attorney.  Most of the time, the selling company’s information is loaded into a virtual data room for the buyer’s review.  Sensitive documents should be coded so that they can only be reviewed, not copied or printed.  The most organized sellers set up the virtual data room before executing the LOI to save time.

Any negative information about the company should obviously not be emphasized.  At the same time, it shouldn’t be hidden.  The seller always makes a mistake when they assume the buyer won’t discover some weakness.  That’s the classical mistake of underestimating your opponent.  The seller should always assume that the buyer will discover this information during due diligence and will wonder what else the seller is hiding.  That usually slows the transaction down and results in the buyer increasing the size of the escrow or adding onerous terms to the Definitive Agreement.  Even if the information remains hidden, it will likely come out after closing, and that will cause the buyer to withhold payment of the escrow or other deferred payments based on the grounds that the business was misrepresented.  Instead, the seller should be upfront with any problems the company has and should indicate potential solutions.  A well-qualified financial advisor will know how to present this type of information.  Let’s face it, 10Ks and many other documents contain negative information that is presented in such a way that it’s not enough of a problem to dissuade someone from investing.  This is the same issue.

To avoid wasting time and before executing a LOI, it is the seller’s responsibility to make sure that the buyer has the financial wherewithal to purchase their business.  Additionally, the seller should ensure that the buyer will be able to run the business once they have purchased it.  If there are red flags, the seller should adjust the payment structure accordingly, to make sure they are getting the best deal possible.  Both the buyer and the seller need to do their due diligence to make sure the transaction closes on or close to the scheduled timing.  That way, both buyer and seller achieve success, which is the ultimate goal.

Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  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.  More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

March 7, 2016

M&A - Researching Potential Buyers

M&A - Researching Potential Buyers

When selling a company, it is always important to research potential buyers, even before launching the transaction.  This information can then be used to shape the seller’s strategy when preparing for the transaction.  By determining what a buyer wants to accomplish by purchasing the company, the seller can be sure to highlight the aspects of the company that will especially appeal to that buyer and other buyers.

Researching a company is not difficult and is always beneficial.  For publicly-traded companies, SEC-required reports are available to the public online.  A Google search on the company, its products, and its officers will yield helpful results.  Other databases, e.g., LinkedIn and the company’s website are also useful sources of information.

Private companies pose more of a challenge as financial data is difficult to obtain, particularly in the US.  Nevertheless, some simple research can usually give one a feel for the size of a company.  For example, if the company has three 100,000 square foot facilities one has to reasonably assume that their revenues are substantial.  Similarly, if the company has one small location it portrays the opposite.  But, one should never ignore that type of buyer.  Frequently, these companies have investors that are more than happy to put more money into the company for acquisitions.

An M&A specialist can also ask questions of the buyer and of others in the industry.  Finding out what businesses the buyer has purchased in the past, how they purchased them, their criteria for this particular purchase decision, and what they are looking for in a potential transaction are just a few questions that can be posed to find out more about the buyer.  Besides just gaining information, this can have the added benefit of determining if the buyer would be serious in making an acquisition.  A buyer with answers to these questions is more likely to be actually looking to make an acquisition whereas a buyer who does not have answers is probably just shopping around and will be unlikely to make an offer.

Properly researching buyers has no downside; at the very least, knowing more about the buyer will make the transaction go more smoothly.  Furthermore, it may increase the chances of closing the deal, and potentially even increase the valuation.  Thus, there is no such thing as knowing too much about a buyer.

Versailles Group, a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. 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. More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

February 28, 2016

Middle market M&A activity, as measured by volume, was the lowest that it has been in 10 years.  By value, M&A activity in January was the lowest since 2009. 

There are many theories about why this is happening, for example, a volatile stock market, declining energy prices, rising interest rates, the slowing of China’s economy, and uncertainty caused by the US election process.  We would not deem this to be a trend unless we see this continue for a few months.

For sellers, multiples seem to be dodging this lower level of activity.  And, in the lower middle market, that is, companies with less than US$100 million in revenues, there seems to be plenty of interest, activity, and definitely no degradation of multiples.

As we’ve all noted, the Fed may not be able to raise interest rates, energy prices can’t fall much more, and an election won’t stop people from completing synergistic or opportunistic transactions.  Thus, there are plenty of good opportunities on both the sell and buy side.

If you’re interested in completing a transaction in 2016, either buy-side or sell-side, now is a good time to explore and develop objectives.

For over 29 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.

If you are interested in discussing your M&A objectives, please do not hesitate to contact me. 

Sincerely yours,

Donald Grava
Founder and President
617-449-3325 (Direct)

Value And The Sale of Your Business

When considering the sale of a business, it is very easy for a business owner to be pessimistic about its value.  This is definitely a mistake, particularly because it can cause a potential seller to miss out on potential opportunities.

It may be ironic that I founded an M&A boutique firm to help people sell businesses; however, my own father, when I was young, who owned a small chain of variety stores, decided to close the business rather than sell it.  He sincerely believed that no buyers would be interested.  Mind you, he didn’t test that theory; however, he thought he was right.

A business owner should never assume that his or her business is too small to be of interest to a large company.  It is important to remember that there is a difference between the financial value as portrayed by the financial statements and the market value.  The market value includes more than just how much the company is worth monetarily.  It includes the value of intangible assets like customer base, distribution network, location, having a unique service or product, having loyal customers, and having name recognition along with steady growth and profits.  These and other factors always contribute to a company’s value but are not always easily quantifiable.

Additionally, just because a company has mediocre recent financial results does not mean it will not sell.  Buyers will look at the future of the company and make an assessment of its potential.  This is especially true when the economy is in a down cycle.  It is also important for the seller to accurately analyze the business’ true financial position, marketability, and potential.  A good M&A advisor will know how to do this quickly and accurately.

For a company with modest financial results, it is important not to oversell the company, as buyers may pull out if they feel the results are unsustainable or the revenue and profit projections are unrealistic.  When pursuing the sale of a company, one must strike a balance between underselling the company and missing out on potential buyers, and overselling it and scaring off or losing potential buyers during the sales process.  Once again, a good M&A advisor can help strike the necessary balance.  The advisor can also provide value-added by finding the “right” buyer who will understand the value and potential of the company for sale.

Versailles Group, a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. 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. More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

The M&A Value of a Customer List

With regard to M&A, what is the value of a customer list?

The most obvious step to take when growing a company is to acquire more business by adding customers. To many, it would seem like the larger the customer base, the better your company will look to potential buyers. However, it is important not to fall into the trap of taking on any and all customers that come your way. In the long run, having too many customers could be a strain on the company’s resources and profitability. The goal is to build and maintain a customer list that will add value to your company when you sell it.

When starting a business, it seems sensible to take on any and all clients. It is critical that one not maintain that attitude, though. While this is a great way to build a large customer base, it frequently results in a situation where each customer will only be generating a small percentage of the company’s income. On top of that, marketing and servicing a diverse set of customers is expensive and could have a negative impact on the company’s profitability. At the end of the day, the best strategy is to eliminate low margin customers. It can also be tempting to do things like take on both commercial and federal contracts to broaden your customer list. Depending on the product or service, this could be a mistake. Some buyers will not want to acquire a company with multiple types of contracts and customers with divergent goals and views of the world. Usually, it is more effective to choose one type of customer and work on developing and maintaining those customer relationships. It’s also more profitable, which will drive the valuation more than just a large list of customers.

Specifically, having a large customer list is not necessarily what will make your company appealing to potential buyers. Instead, one should work on developing long-lasting, large client relationships with clients that have shared needs and characteristics. Ultimately, having a smaller number of loyal customers will give your company a higher value in the eyes of prospective buyers. To be clear, profitability per customer is important. It’s also very important to avoid customer concentration, i.e., having one customer account for more than five or ten percent of total revenues. Thus, if your company doesn’t have customer concentration, has long term customers with steady contracts, and they provide above average profits for the company, you’ll have a very marketable company that will generate a high valuation.

Versailles Group, a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. 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. More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For more information, please contact

Donald Grava
Founder and President
617-449-3325

Versailles Group is pleased to announce that Data Translation (www.datatranslation.com), with operations in the U.S. and Germany, has been acquired by Measurement Computing, a subsidiary of National Instruments (www.ni.com) (NasdaqGS: NATI).  Versailles Group acted as exclusive financial advisor to Data Translation.

The text of the Press Release is listed below for your convenience.

BOSTON, Nov. 13, 2015 /PRNewswire-iReach/ -- Versailles Group, Ltd. (www.versaillesgroup.com) announced today that Data Translation (www.datatranslation.com), with operations in the U.S. and Germany, has been acquired by Measurement Computing, a subsidiary of National Instruments (www.ni.com) (NasdaqGS: NATI). Versailles Group acted as exclusive financial advisor to Data Translation. Terms were not disclosed. The transaction closed on Nov. 10.

Photo - http://photos.prnewswirCome.com/prnh/20151112/286929LOGO

Versailles Group, a 28-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures, advised Data Translation on the transaction. Versailles Group works with companies in the U.S., Europe, Canada, Asia, and South America.

Data Translation ("DT"), founded in 1973 and headquartered in Marlboro, Mass., is a leading designer, manufacturer, and provider of data acquisition solutions for the test and measurement marketplace. With expertise in the design of high-accuracy, high-quality hardware and application software, DT partners with end users and OEMs to achieve their test and measurement goals. The company offers modules compatible with USB, LXI, PCI, and Ethernet and the supporting application software. Popular applications for the products include sound and vibration, temperature measurement, strain and bridge-based measurement, and voltage measurement, among others.

"The sale of DT fulfilled the primary shareholders' desire for a liquidity event." said Donald Grava, Versailles Group's founder and president.  By using Versailles Group's worldwide approach to finding the right buyer, DT was sold to Measurement Computing ("MCC"), a NI subsidiary. Fred Molinari, Founder of DT, said, "By joining MCC, our customers will benefit from an enhanced product offering, continued support of existing products, and the resources to build on over 40 years as an innovator in data acquisition."

About MCC

Measurement Computing (www.mccdaq.com) designs and manufactures data acquisition devices that are easy to use, easy to integrate, and easy to support. Included software options are extensive and provided for both programmers and non-programmers. Free technical support, limited lifetime warranties, and low cost of ownership make Measurement Computing the easiest choice for data acquisition. 

About NI

Since 1976, NI (www.ni.com) has made it possible for engineers and scientists to solve the world's greatest engineering challenges with powerful platform-based systems that accelerate productivity and drive rapid innovation. Customers from a wide variety of industries – from healthcare to automotive and from consumer electronics to particle physics – use NI's integrated hardware and software platform to improve the world we live in.

About Versailles Group, Ltd.

Versailles Group, Ltd. is a Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. It provides its clients with a high level of personal attention, international experience, and professional execution. Since 1987, Versailles Group's skill, flexibility, and experience have enabled it to successfully close transactions, both domestically and internationally, in all economic environments. More information on Versailles Group can be found on its website, www.versaillesgroup.com.

Media Contact: Donald Grava, Versailles Group, Ltd., 617-449-3325

Business Appraisal or Investment Bank?

Small Business Appraisals: Should You Just Hire an Investment Bank Instead?

How much is my company worth? Every business owner should be asking this question! Business owners usually plan to sell their company eventually, and understanding the business’ actual value is absolutely critical to planning a retirement strategy.

There are many valuation services that cater to small, privately-owned companies. These services can cost up to US$50,000 and will use a multitude of valuation techniques. The end product is an intricately detailed report that attempts to determine the intrinsic value of the company. Yet when it comes to selling a company, such services always overlook one important fact. At the end of the day, the most important determinant in a seller’s price is how much the buyer is actually willing to pay. Appraisals can be useful for getting a ballpark estimate of your company’s worth, but complex valuation models won’t change the fact that pricing mainly depends on the buyers, especially when the company isn’t publicly traded. This is why it is so important to have the right buyer.

The only time a business owner will ever get a completely accurate valuation of his or her company is when it is finally brought to market. Even if one chooses to get the business appraised beforehand, one would still need to find real buyers afterwards. Just because a valuation report claims that your company is worth US$20 million doesn’t mean that buyers will be willing to instantly hand you US$20 million in cash. The M&A process including painstaking negotiations are still necessary to secure a strong offer, especially if you have any specific preferences on deal structure (e.g., if you want to stay with your company after the sale). Most of the time, an auction process involving multiple bidders, will maximize the value of the business, and with the right buyer, you will receive an offer higher than the initial valuation.

That’s where a boutique investment bank like Versailles Group comes in. Versailles Group has nearly three decades of experience in searching for and negotiating with buyers from around the world. By applying its expertise and experience, Versailles Group will enable you to obtain the maximum value for your business. Hopefully, this will give the business owner some insight into the question: small business appraisal or investment bank?

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, which is why it has won several M&A awards. 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 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)

Technology Sector M&A Activity

(Please click the chart for easier reading.)

Technology Sector M&A Activity

Across all sectors, M&A activity, for the twelve months ending May 31, 2015, has increased relative to the same time period last year. Both strategic and financial buyers are completing more acquisitions because of the recovering US economy, the impending interest rate hike, and other factors. The data above illustrates the increase in M&A deal volume in the middle market.

The technology sector has accounted for most of the increase in deal volume. In the last three months (March-May 2015), there were 526 deals completed in technology services-- more than any other sector. That number is up from 477 technology services deals completed from March-May of 2014.

The need to innovate, grow, and keep pace with the changing technological landscape is fueling M&A volume in the technology sector. Technology companies are increasing their IT capabilities via M&A strategies to scale their operations, develop domain expertise, or for growth prospects.

The rationale for acquisitions in the technology sector is strong: internet data traffic is expected to triple from 2014-2019. In addition, 50% of this internet traffic is expected to come from devices other than traditional desktops. Technology companies are acquiring businesses that enable them to ensure growth through the development of new technologies or to penetrate new markets.

Whether it's a tech company or not, if you are interested in completing an M&A transaction there is no better time than now. The looming interest rate increases, possible change of political party, world events, etc. are driving people to complete deals before it's too late.

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

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