You’ve finally met your perfect match – but how do you know when the price is right? Matt Nicholson, one of Tenzing’s Acquisitions Directors, knows how to be on the money in the world of acquisitions.
After a long search, you’ve finally found a business to acquire which fits well with your business strategy. You hope it will add and create value for your own entity. Congratulations – that’s often the most significant hurdle in the acquisition process that you’ve cleared!
But then there’s the small matter of money and how much you should pay to buy the business. It isn’t like your typical retail transaction, where there is a sticker on the front with the price on it. Especially if this business was not for sale in the first place until you came knocking.
So how does it work?
Linking price to value
One of the key things I’ve found is valuing any business using external or market metrics is hard. You can look at what comparable companies have sold for recently and try to rationalise how this one is similar or different, or better or worse. But it’s rare to find a perfect comparison.
When looking for a bolt-on acquisition, a far more important – and often easier – question to answer is, “what value will this acquisition create for my business?”
There are lots of factors that feed into the answer. Not all of these are quantifiable. But focusing on things like how you will operate it post-transaction and what impact that will have on the P&L is a great place to start. Once you’ve done that, you will have a view of the financial contribution that business will make to your own, once all the hard work of integration is complete.
By applying the multiple of profit you believe your business is likely to be worth to that contribution, you then have a clear idea of what the target business is worth to you. Simplistically, if you pay less than that figure, you are creating value. But if you pay more than that figure, you are destroying value.
Never quite as simple as that, though, is it?
Considering all the variables
There has to be a recognition of other quantifiable factors. For example, the fees involved in executing a transaction, the cost of financing it, and the returns expectations of your investors. There’s also the non-quantifiable things, like how much management bandwidth will be taken up to deliver the desired result. And what else is that stopping you from doing? There’s also the risk associated with buying any business. You can never really know what you’re buying until you own it.
All of this feeds into what you will be happy to pay for a business to ensure it’s “worth it”. Sometimes this is really easy – we can buy this business for 6x profit then sell it as part of the group the day after for 12x profit – and other times more marginal.
The right price, however, is always one that a vendor will accept and that you’re happy to pay. This means you have to listen really carefully to vendors to understand what they actually want. My job is all about building good enough relationships to ensure you get the real answer. Sometimes it’s the highest price possible. But more often than not, they want to know what’s going to happen to the company they spent years building. They want clarity on what the options for themselves as founders are post-deal.
When it’s not always about money – and when it is
There’s always a monetary and non-monetary element to whether a price is attractive to a vendor. You’ll be surprised at how often it’s the non-monetary part that actually makes the difference. Case in point is a Tenzing portfolio company for whom we were making an acquisition last year. The vendor had come close to selling their business to another buyer earlier in the year, but it hadn’t happened. Even though we offered a similar (actually slightly lower) price, we managed to complete the acquisition. How? By gaining a clearer understanding of what they wanted post-deal. Ultimately, this got them to sign on the dotted line.
Having said that, there is always a point at which money will talk the loudest. If there are two separate deals on the table and the difference in value is big enough, even the most principled of vendors may be left with little choice.
It’s often harder as a buyer to have the confidence to walk away from things because they’re too expensive. Particularly if you’ve already spent significant amounts on due diligence providers and feel like you’re so close to the line. The fear of failure or making the wrong decision is real. Making the right call in this scenario is something as an investor we hope we can help our management teams with.
If you do get into that situation, you’ll be hoping that the vendor’s expectations change over time to put the deal back on the table. Often it does. They’ve had time to think about what having a hard offer in front of them means, or because trading doesn’t quite go as planned.
Striking the right balance
You might also find you have to make an offer when you don’t know all the answers and have had to assume certain things. What happens then, if when you get into diligence, the answer isn’t what you thought? As you clearly set out the assumptions you’ve made in your offer, you retain the moral high ground to go back and change the price as the business isn’t what you thought it was. We’d always much rather avoid this, though, because it’s all about trust, so we try really hard to deliver the deal agreed at the outset wherever possible.
It goes without saying that the best deals are when the price and structure are attractive to vendors. But you also know as a buyer it will create long term value for your business because of where you believe you can take it post-acquisition. That’s your classic win-win outcome.