13 Sep Selling Your Business to a Strategic Buyer
When you’re selling a business to a buyer your main goal is to find the value of the synergies created by the merger of the entities and gather as much of that value as you can. The first step in grabbing that value from the synergy is estimating a dollar amount of value created by the synergy. As we mentioned in our last article, synergies come from different areas including Process Improvements, Cost & Risk reductions, Economies of Scale, and Revenue Augmentation. According to BCG (The Boston Consulting Group), 94% of merger announcements that disclose the value of synergies only mention cost synergies and not the nature of where it came from. The main reason for this is cost-based synergies are the easiest to quantify. For instance, estimating the savings from removing administrative redundancies, consolidating operations, and an increase in purchasing power is all very straight forward.
With everything we’ve mentioned above, acquisitions completed by bigger companies usually result in significant revenue synergies. A lot of larger corporations acquire smaller “bolt-on” companies in order to add more complimentary products to their arsenal, which their sales people then turn and sell to their existing customers. The potential there is in selling both company’s products to another company can increase the Buyers overall bottom line.
A 2012 study done by Thompson Reuters showed that transaction synergies from 365 deals with values of more than $300 million which took place from 2000 – 2011 ranges anywhere from 2 to 10 percent (depending on their industry) of a the targeted company’s latest annual sales figures, with an average of 4.8% (see chart below). Let’s say a similar level of synergies exists with lower middle market transactions (IE. transaction values less than $100 million) we can assume that the synergies add to another 50% or so to a typical company’s EBITDA (Earnings before interest, tax, depreciation, and amortization). However what if the Buyer makes billions of dollars in your market. The simple idea of just giving your products to their sales team can increase your Company’s revenue by huge amounts.
Source: Thomson Reuters Data Stream
A Thomas Reuters study mentions another statistic which is the median amount of synergies retained by a selling company and shown in a transaction price is 31%. If we multiply 31% by 50% of incremental value generated by the synergies, we can safely assume the average transaction premium amount captured by Sellers from synergies is roughly 15%. This means a 5x EBITDA multiple (small company multiple paid for companies with an anticipated 10% compound annual growth rate) would increase up to 5.75X if sold to strategic buyers with average synergies. It’s important to understand that the 31% statistic is based only on transaction values over $300 million. The Sellers of these transactions usually employ only seasoned transaction advisor where Sellers of lower middle market (less than $50 million) transactions, and certainly those with transactions less than $20 million who don’t have the expertise.
It is our experience that most sellers of smaller transactions (less than $20 million) see little to no increase in value from synergies from a sale to a buyer. This is unacceptable from our perspective.
There is definitely a huge magnitude of potential financial buyers versus strategic buyers, so what’s the point in searching for a strategic buyer if the Seller doesn’t benefit from the synergies! The 31% of the total synergies captured by a Seller is not acceptable to us. If you effectively prepare a company for a transaction, thoroughly study the Buyer’s operations so you can create a reasonable value of potential synergies, and then applying experienced negotiating skills you should grab a lot more than 31% synergistic value.
You should never settle for little or no share of synergies let alone the average of 31%. Sign up for our newsletter to get our next set of articles where we’ll talk about how Sellers can grab more shares of the synergies created.
1. March 27, 2013; Jens Kengelbach, Dennis Utzerath, Christoph Kaserer, and Sebastian Schatt; How Successful M&A Deals Split the Synergies. 2. Assumes that a typical EBITDA margin of a well run company is 10%.
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