This post is the second in a series outlining how buyers and sellers can bridge the business valuation gap.
A number of macroeconomic factors are playing into the higher corporate valuations of today’s mid-market business deals. A good environment for IPOs, strong corporate balance sheets and cash positions, and general availability of buyout capital are having an upward impact on the value of private deals. Company acquirers, particularly if engaged in a buy-side transaction, are finding themselves paying more of a premium than in any other time since 2007. It makes it difficult to maintain buy-side discipline when the pressure to put capital to work is strong. Maintaining that buyer discipline is key as most deals can and should be accretive to the buyer. The following pointers may prove helpful.
Dealing with Higher Valuations
Rapid Due Diligence
As both buyers and sellers become more sophisticated, LOI’s and Purchase & Sale Agreements become shorter and more succinct. Consequently, more stringent due diligence is being matched with equally disciplined post-LOI negotiations. From the buyer’s perspective, this approach can be time-consuming and costly. Unfortunately, it is also very necessary, particularly if a premium is being paid for the company. Understanding which due diligence areas serve as both bottlenecks and increased cost areas are paramount to the entire process. While there are ways to perform the necessary due diligence rapidly without incurring greater unwanted costs, difficulties remain. What follows are some potential pointers to help keep on task during the DD phase as well as keep costs and timing in-check.
The aforementioned pointers are not meant to “squeeze blood out of the stone,” but they may prove helpful in avoiding some of the headaches associated with any deal. As any dealmaker will attest, transactions are never easy. Even the smoothest deals, have speed bumps, hiccups and the occasional heartburn. Several certainties remain. Firstly, preparation precedes success. Second, despite the best preparation, deals can head down a path wholly unintended by both buyers and sellers. Third, regardless of how many times you’ve done deals, you always learn something from the process. By using a licensed investment banker you can avoid many of the costly learnings and benefit from their experience