How to Maximize the M&A Valuation of Your Company

November 11, 2016

Many CEO’s and Boards focus almost exclusively on the revenue growth of a company to maximize the M&A valuation. While revenue growth is important in the M&A, it is critical to initiate a robust M&A process and examine the M&A market and its effect on the M&A valuation of your company.

Create Strong Demand for Your Company with a Robust M&A Process

A client at a growing tech company had been approached by a large public company. The CEO wanted 14x revenue for his company based on my research that found a precedent transaction at 14x revenue. I indicated that the average of the precedent transactions was 5x, but I would put any number on the table he wanted. In order to obtain 14x, I generated a robust M&A process by reaching out to numerous potential buyers and created a heated auction process. The buyer with the winning bid, a multibillion dollar public company with version 1.0 of this particular technology, was desperate to buy my client, who had version 2.0. The transaction closed at 14x revenue. If we had negotiated only with the buyer that had initially approached the company and not generated heated competition in the M&A process, the valuation would have been substantially less. If you are approached, do not go down the road with just one buyer, but create intense competition to increase the valuation.

Search for Domestic and International Buyers to Maximize the Strategic Fit

At Bois Capital, we signed up a US client in the Intelligent Transportation Sector (“ITS”) sector, which uses technology to maximize efficiency in transportation, e.g. how many buses to send to a stadium when the football game ends and how many trains to send to the train station when the buses arrive. We did a global search and found a billion dollar company in Spain that provides software for the ITS sector. The Spanish company was eager to acquire a company in the ITS sector in the US. The Spanish company was willing to pay a substantial premium compared to a US buyer given the excellent strategic fit and the Spanish company’s willingness to pay a premium to enter the US market. Include both domestic and international companies in the search for a buyer to maximize the strategic fit and thus the valuation.

Sell Your Company in an Active M&A Cycle

It is important to understand that we are now in one of the most active M&A cycles in the history. I represented an Indian public company that was interested in acquiring a software company in the healthcare vertical. The year was 2007. The company received numerous offers and my client was selected to enter into an exclusive period with the company. The transaction closed for $330,000,000 in October 2007. Shortly thereafter, the housing crisis hit and the M&A market was in the doldrums for years. The seller knew that the strong M&A cycle would not last forever and chose the right time to sell to maximize the valuation. Sell in an active M&A cycle or be prepared to wait for years until the next active M&A cycle occurs.

Do not be the Last of Your Private Direct Competitors to Sell

At Bois Capital, we represented a Swiss mobile analytics company on its sale to Gemalto, a billion dollar public Dutch company. Given our knowledge of the sector, we were hired by another mobile analytics company in Europe. We generated several significant offers, but the Board decided not accept the offers, as is their prerogative. The CEO showed the board an over optimistic revenue projection for the next several years. The Board determined that if the company sold in 2018 with higher revenue at the same revenue multiple, the valuation would be higher. What this analysis does not factor in is the M&A cycle of a company and its closest competitors. If a company has five competitors in its specific subsector, the first competitor to sell typically receives the highest valuation and the fifth competitor to sell receives the lowest valuation. This is a simple case of supply and demand in the M&A market. The fifth company has less buyers to sell to and will now be competing with the large public companies that have acquired its competitors. Monitor your direct competitors closely and do not be the last company to sell.

Sell Your Company at the Peak of the Hype Cycle

At Bois Capital, we represented a client with a messaging app that included video and chat. The messaging app sector was at the peak of the hype cycle, with many public companies eager to acquire a private company that competed with Snapchat. Despite the fact that AOL was in the middle of being acquired by Verizon, AOL acquired our messaging client at a substantial valuation in order to compete with Snapchat. If your company does not sell at the peak of the hype cycle, you need to be prepared to wait for years to sell and compete with the large public companies that have bought direct competitors or have developed their own competing technology.

In addition to revenue growth, it is critical to create a robust M&A process, include international buyers, sell in an active M&A market, not be the last of your direct competitors to sell, and sell at the peak of the hype cycle in order to maximize the M&A valuation of your company.

Ben Boissevain, Founder 

Ascento Capital, LLC
ben@ascentocapital.com
646-286-4589
www.ascentocapital.com

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