Bridging Buyer/Seller Valuation Gaps in M&A
Price and valuation discussions in M&A are some of the most oft avoided, carefully tread and frequently botched. Treating any valuation discussion in a silo is always a mistake. Value can not only be one of the more complex and sensitive topics, but the cogs that both determine and express value are equally convoluted. Apart from the quantitative metrics that drive value–of which there are many–the soft qualitative and important factors are often overlooked. Focusing on price and price alone can be disastrous for both buyers and sellers alike. In stating this, I realize it may be a bit euphemistic. In reality, most sellers want high valuations with all-cash payments. Such deals do occur, but they are more the exception than the rule. Rather than focus simply on the hard valuation along with how it is paid, buyers and sellers would be well-served to look at the other cogs that drive valuation in an acquisition scenario.
Regardless of the industry, size or structure, it is a fact in each deal that buyers want to pay the least amount possible and sellers want to maximize their value. Other moving parts on both the qualitative and quantitative side are often ignored or downplayed, including:
- Non-cash considerations including stock, earnouts and notes. Public stock and tax considerations may help drive a seller toward considering some of these expanded consideration methods above others. Complex transactions and externalities can produce creatively complex structures in mergers and acquisitions.
- Family considerations including no heir-apparent, retirement, health concerns and spousal issues. The business sale is complex enough without bringing in the added layer of family dynamics.
- Age and longevity can create owner burnout. Burnout should never be an excuse for a fire sale, but it can help to create a more favorable scenario of getting the business on the right track toward selling.
- Momentum can drive toward close. Momentum can create a scenario where the buyer may find quick excuses to ratchet-down value at the 11th hour, but it can also help drive toward a quicker close once buyer and seller are aligned on the most important deal points–the main point being value.
Price alone should never be the primary driver on either side of the transaction for getting a deal over the finish line. However, it is a topic that needs to be carefully negotiated to ensure both parties are strategically aligned on the largest, most important deal points. Before the dollar figure becomes a topic of discussion in negotiations, it is best to approach the strategic fit discussion. Once there is alignment on most of the soft metrics, price is the next natural discussion. This is at least one of the reasons buyers and sellers often punt to discuss specifics on valuation during discussions at buyer management meetings.
Money is a strong motivator, but it should never and is rarely ever the only driver of the eventual exit. When valuation becomes the heavy sticking point, sometimes it is better to back away, take a look at the deal from a 50,000 foot view and start to move back in by discussing some of the many other reasons the deal makes sense for all parties. Gaps will almost always exist unless the investment banker is able to create significant demand for the business to drive up the price.
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