Winter Conference of the Alliance of M&A Advisors (AM&AA)

Daily, the sale or merger of a company involved in a service industry grabs the headlines.  Whether a service provider to the healthcare, insurance or other industry, it feels like all companies and industries are in “play”.  The announcements of these sales or mergers are normally accompanied with assurances from management that the ownership change will not adversely affect employees or the level of service to customers.  Regardless how strong the promise, the fear associated with change is unsettling for many.  So while the pace of mergers and acquisitions (M&A) continues to increase, business owners in all industries must continue to keep a watchful eye and consider all options for succession of ownership, both external and internal.  One interesting option, which we’ll discuss further, may be the sale to an Employee Stock Ownership Plan (ESOP).

As valuation experts, we are also called upon to be advisors.  We could simply perform a valuation using the standard of value dictated by the client or attorney; that would certainly fulfill our role as an expert.  However, in most cases, our clients are better served when we act as advisors as well.

“The biggest human temptation is…to settle for too little.” – Thomas Merton

Be wary of valuation calculators on the websites of many business valuation and M&A advisory firms.  These calculators allow business owners to enter basic financial data and quickly retrieve the “value” of their businesses.  Many of these products describe the final result as a “business valuation”.  While it may be appealing for owners to receive a free, quick and easy valuation, the results should not be relied upon.  Remember, you get what you pay for.

Attendance at this year’s WINDPOWER conference was down, but the mood did not match. Below are some takeaways from the conference.

Most people are aware of the litigious nature of our culture, and are clear on the notion that people are increasingly willing to play the “blame game” in the courts.  At the risk of stating the obvious, when confronted with circumstances wherein the pursuit of a monetary damages claim is appropriate, it is first and foremost essential that one engage experienced legal counsel. Secondly, engaging a capable financial expert that can provide key insights to legal counsel early in the game is essential. In that regard, your financial expert should possess credentials that address a wide spectrum of knowledge, including corporate finance, quantitative economics, valuation, solvency and fairness, intellectual property and financial forensics. These skills, amongst other things, will lead to a supportable conclusion as to the quantum of the prize with “reasonable certainty;” a conclusion that will take into account all of the possible factors that might arise in the courtroom setting, whether they favor or disfavor one’s position.

The differences between controlling interests and non-controlling interests are many and manifest themselves in ways that affect both the operations of the company and the valuation of the interests in question.

Currently the stock market is doing well, optimism in the economy is good, and debt remains cheap. All of these factors have created a robust M&A market for companies across many sectors with good companies achieving valuations that strong companies would normally achieve. This is expected to continue. For company owners and sell-side advisors that is great news. At this stage, when activity levels are high the smart money should strive for acquisitions that will have sustainable revenue during the inevitable downturn. This is a more defensive strategy due to its counter-cyclical nature.

In the merger and acquisition market there have been many flavors of the month, but the demand for industrial companies is the equivalent of chocolate: almost universally and consistently liked by acquirers. Industrial companies including, manufacturing, distribution and services, are a significant portion of the American economy and will remain so well into the future. At one time, the demise of the industrial sector was predicted as low cost manufacturing transitioned overseas. In recent years the demand for industrial products produced in the U.S. has expanded. Throughout these differing viewpoints M&A activity in the industrial sector has remained strong.