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FROM THE FOUNDER
T here is a tremendous interest in mergers and acquisitions in our industry. More and more private equity is flowing into our industry every day, and the professional service providers that support these transactions are gaining more experience in all of the mechanics of how to do and finance these deals. Successful mergers and acquisitions require an entrepreneurial mindset focused on growth, branding, and value creation. Entrepreneurial mergers and acquisitions
Mark Zweig
That said, if one thing is lacking in so many of those advisors, it is a true understanding of entrepreneurship. The whole idea behind entrepreneurship is about creating value that can be extracted on exit. What creates value? A high revenue growth rate is number one. And having a brand that makes the phone ring and emails come in without outbound sales is another. That brand in turn supports higher prices and makes the firm better able to weather the comings and goings of people versus individuals you hire bringing or taking your business with them. Recurring revenue streams are yet another big value driver. More of that is better than all individual project-driven revenue. Valuations using multiples of historic EBIT are fine for steady state companies that are flat or barely growing. But for growth companies with a real brand, the EBIT that matters is projected future EBIT based on two things. One, revenue growth rate. And two,
what kinds of overhead savings can be realized in the selling company if they become part of the buying company. That will give you an entirely different set of numbers. Buyers who do enough of these deals with high growth companies that have a real brand soon figure out that they then take on all of the characteristics of the companies that are under their umbrella. Then the whole thing has incredible value because the acquirer has proved they can buy and integrate other companies successfully and are therefore what is called a “platform” company by the private equity crowd. Platform companies are the most valuable ones. And by the way, don’t get too hung up on internal growth versus acquired growth. Who said internal growth is more highly valued? I don’t think you will find the evidence to support this commonly- held misconception.
See MARK ZWEIG, page 6
THE ZWEIG LETTER OCTOBER 7, 2024, ISSUE 1556
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