Lorne Grohe has an interesting series going on valuation. His posts contain lots of useful detail and tactics for dealing with valuation discussions. Inherent in all this is a theme that’s critical if you want to make a deal happen – you’ve got to be prepared. If you’re looking to acquire someone, you’ve got to know as much about them as you can. What challenges or opportunities will they have in the next year? Who else is sniffing around? How’s the financial position? What’s the company culture like? How viable are their transaction alternatives?
Naturally, buyers also need to have a keen understanding of their own transaction alternatives, including organic growth. The “build” alternative may not come up in negotiations, but it certainly will be of interest to senior management or the BOD when it comes time to approve the deal.
On the seller’s side, preparation is even more important, yet for some reason it’s more common to see woefully prepared sellers than buyers. If you get a call out of the blue from a potential buyer, and you’ve got no interest in selling, it’s fine to simply throw a fantasy number out there. If they want to pay it, great! If not, back to business. But if you’re actively shopping your company, there’s no excuse for not knowing everything about yourself that impacts value (good and bad) and everything about your suitors. What’s their debt capacity? How are the growth prospects? Can they build a competitive product or service, and at what cost/timing? What synergies are they likely to realize? Are there shareholder/regulatory approval issues? How hungry are they?