September 14, 2010

Arguing with the Market (Classic Mistakes in Exit Strategy vol. 4)

By Eric Michaels, Senior Analyst, MergerTech Advisors

From a sell-side M&A perspective, arguing with the market means you believe that valuations are too low.  Many business owners feel that they should be worth more than the offers they are receiving.  The problem is that if the market is paying X, then you are worth X.  No business is worth a value that the market refuses to pay.  After receiving numerous offers of similar value, you should begin to get a sense of how the market is valuing your business.

The only way you can improve your business valuation without dramatically changing the company or its bottom line is to either try a new marketing approach and/or to reach out to buyers that are unrelated to the ones you have previously spoken to.  While this may improve your valuation and potentially your likelihood of closing a deal, the problem sometimes lies in unrealistic expectations.

Typically, the reason business owners argue with the market is because they have seen larger valuations in the past or with another company.  It is important to remember that different companies are valued individually based on their size, business model, margins, and any unique IP or relationships inherent to the company.  Just because one company was valued at a certain multiple of revenue, doesn’t mean that the same multiple applies to your business.  Your business’ multiple could be higher just as easily as it could be lower; furthermore, a buyer may have completely overpaid and building up an expectation from that transaction creates goals that are unrealistic and unlikely to be met.

M&A valuations have fluctuated in the past few years; however, historical multiples do not determine today’s multiples.  Concentrating on a lost M&A opportunity in the past or on a better valuation from yesteryear will only ignore the simple truth: today’s market is what it is.  That is not to say that companies cannot achieve an attractive price, but expecting valuations from the years of loose credit environments that gave rise to the LBO or even the dot-com era is a recipe for disappointment.  It is important to be comfortable with the M&A environment if you intend to begin the process of selling your business.

Ultimately, there are many reasons to sell that are independent of the economic outlook:

The first two need little explanation, but the third brings to mind Oracle’s recent acquisition of Sun Microsystems.  Oracle announced their intention to sell directly to Sun’s top 4,000 customers without relying on a third-party.  Sun resellers that were content with their pipeline may now be experiencing some uncertainty about their future.

New developments in a particular space can dramatic change the landscape of the market and may blindside those who are unprepared or unable to adapt.  Selling your business can hedge away your company’s risk to the element of uncertainty that always exists in the marketplace.

The right time to sell isn’t just about market multiples, it’s about timing in general.  Whether you want to exit on a personal level or you feel that it is time for someone else with greater resources / different expertise to take the business to the next level, it is important to time your exit correctly.  Waiting for a market to “pick up” may lead your business to become obsolete.