Managing M|amp|A process can boost market value

The '90s will surely be known as the decade of mergers and acquisitions. The economy was strong, capital readily available for buyers, and business owners capitalized on current valuations and enjoyed the fruits of their labors.

Merger and acquisition activity

There are many reasons business owners consider selling their businesses: retirement, industry consolidation, competition and high market values to name a few. Whatever the reason, owners ask how they can:

Increase value

Find qualified buyers

Negotiate the sale

Maintain confidentiality with employees, suppliers and customers

Manage the sale while also running the daily operation.

Getting started

The '90s' economy, together with M&A activity, created the right environment for achieving favorable valuations for companies, but it takes more than luck and market conditions to boost the value of a company.

Just as the successful operation of a business requires a plan and focused management, the successful sale of a business requires the same approach and commitment. A sale often is the single largest financial transaction of an owner's career, yet many owners fail to plan for and manage the process properly.

The sale process is a team effort, and having the proper team focused on the plan produces the best results.

Boosting value

In the case of manufacturing companies, they are generally valued based on a combination of earnings or cash-flow multiples, and asset values. Multiples paid for manufacturers based on earnings or cash flow can vary dramatically from industry to industry.

It takes an understanding of the factors that influence these multiples to boost the value for a particular company. These factors include market position, strategic fit with the prospective buyer, earnings potential and managed negotiations.

Do not assume that just because you've been approached by a buyer in the past that it is the best or only prospect.

Determining the strategic fit of two organizations requires understanding and matching the needs of a buyer with the strengths of a seller.

Do the two organizations have skills that complement each other? Can the companies operate more efficiently through the consolidation of their operations? Can the companies add value to their combined customer base? Does the combination eliminate competition or protect from outside competitors? Does the combination create better control over the supply chain?

These are only a few of the questions to address to evaluate a strategic fit. The better the fit, the higher the value.

Earnings potential is not always reflected on the face of the company's financial statements. Careful analysis will determine what the earnings could be subsequent to an acquisition.

This analysis may include eliminating a portion of the salaries paid to stockholders, nonrecurring expenses, related business startup or equipment setup costs, or discretionary expenses not needed for the normal operations of the company.

Inventory valuation issues, such as the use of the last-in, first-out accounting method or conservative valuation formulas, usually create adjustment opportunities for both the balance sheet and income statement. Expenditures for Y2K compliance and ISO certifications also can be adjusted opportunities. The analysis also would include capturing the financial benefits generated by the strategic fit of the buyer and seller.

The balance sheet should be analyzed to develop an understanding of the market value of the underlying assets. The book value of a company's assets usually does not accurately represent the underlying market value, and adjusting the balance sheet to market will help increase the overall company value.

Where are the buyers?

It's common for business owners to be contacted by potential acquirers, who may be qualified purchasers well known and respected in the industry.

Even if the prospective buyers are well-known, a well-thought-out plan managed by a competent team will generally produce better results for the owners than dealing with one buyer.

Additional qualified strategic and perhaps financial buyers should be identified. Even if the company has been approached by buyers, a managed competitive negotiating environment with multiple buyers generally produces higher values.

Negotiating the sale

Communicating a seller's information is critical to a successful transaction. Negotiations with a prospective buyer begin with the first contact. The timing and content of the information given should be structured to protect the seller while exploring the possibilities of a sale.

The negotiations cover such items as price, financing terms, deal structure (such as asset or stock sale), assumption of liabilities, excluded and included assets, employment contracts, environmental issues, leases, noncompete agreements, representations and warranties, condition of property, plant and equipment, the valuation of inventory and the ability of accounts receivable to be collected.

Every transaction has different dynamics, and it's crucial to manage the negotiation process in a manner that produces sufficient leverage to achieve desired results.

Maintaining confidentiality

The use of a strong confidentiality agreement to protect the seller is a must and requires the buyer to keep the seller's information and the fact that the company is for sale confidential.

Managing business during the sale

The sale process requires a significant time commitment. In most closely held businesses, the owners are actively involved in the day-to-day management of the business and don't have the time to properly manage the sale.

Most buyers look closely at current company performance when determining value. This is the time when the most valuable use of the owner's time is in improving performance.

Your business is usually the culmination of many years of effort and represents the largest financial asset of your estate. You want to realize the highest value possible when it comes time to sell it. A marketing process that identifies strong strategic buyers, coupled with a managed negotiating process, will generally produce the highest values for your company.

(Steve Blumreich is the president of BKD Financial LLC, a corporate finance specialist firm and a subsidiary of Baird, Kurtz & Dobson in Springfield.)