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W hen we begin working with an M&A client on the selling side, one of the very first questions we’re asked is, “What are we worth?” I can answer the question. It might not be the answer that my new client likes, but I can answer it accurately every time. What are you worth? You’re worth what the market will bear. Determining the listing price If you are thinking about selling your A/E/P or environmental consulting firm, a front-end valuation is essential before heading to market. O P I N I O N
Jamie Claire Kiser
While the prospective sellers out there are rolling their eyes, hear me out. There are hundreds, if not thousands, of factors that determine what your firm is worth. It is not as simple as putting a “for sale” sign in the front of your office and starting a bidding war. In addition, it’s not just determining what your firm is worth – it’s also determining what the buyer is buying – something that we truly cannot know until we start reviewing offers. “There are hundreds, if not thousands, of factors that determine what your firm is worth. It is not as simple as putting a ‘for sale’ sign in the front of your office and starting a bidding war.” The firms that are fully prepared for an external ownership transition usually start the process a few years before they engage a consultant and are ready to be sold. These companies have often had a formal valuation done to establish a baseline, and they have spent a few years engaging in activities that were identified with a higher appraised value. They’ve spent time doing things that have driven the value of their firm upward. Once you have a rough idea of a value – determined by an expert business appraiser with experience in our industry – and you’ve worked to increase the value proactively, it’s time to approach buyers that we think will have a strategic reason to be interested in your firm. Strategic buyers are ones that believe that the products and services your firm offers can be synergistically integrated into their existing lines of business to create incremental long-term value to their own firm. Once we know who the strategic buyer is, and what lines of business they offer, we can make adjustments to the seller’s financial statements to show “the future” and more accurately reflect the value of the acquisition to the buyer.
Knowing your own financial statements and understanding the drivers of value are two ways that someone considering an external ownership transition can help garner a higher purchase price. As an example, take a seller that is an architecture firm, and the prospective buyer is an A/E firm. The seller would have to sub out engineering work, and net service revenue is reduced for engineering fees billed on projects. The amount that will no longer have to be subcontracted out can be added back to the seller’s net service revenue. The same logic applies to many other aspects of the deal. The question of what is being acquired should not be overlooked. Understanding what happens to assets like cash, receivables, fixed assets, and prepaid expenses is important, as well as any liabilities outstanding – these things can add up to major adjustments in book value. Other common adjustments on the income statement side include changes in salaries going forward, changing overhead rates, discretionary expenses like charitable contributions or that big, lavish holiday party you’ve always thrown, and one-time costs that distort profit. “What are you worth? You’re worth what the market will bear.” Once we understand the value that the seller could add to the buyer – in terms of new clients, cost synergies, revenue streams, lines of business, leadership gaps, and more – we can start to talk numbers and begin to make adjustments. If you are considering selling your firm in the future, obtaining a formal valuation and identifying areas that can be improved internally to increase your value is a great starting point, especially if you have several years to address these issues and clean up your financial statements. I know it’s hard to hear as a seller, but we really cannot know what your firm is worth until we start talking to buyers and hearing their vision of the future. JAMIE CLAIRE KISER is Zweig Group’s director of M&A. Contact her at jkiser@zweiggroup.com.
THE ZWEIG LETTER February 29, 2016, ISSUE 1141
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