M & A 101: Lessons Learned From Decades of Deals Jan/Feb 2021

Two Key Components in Optimizing a Deal

by Loren Smith

Valuation is, of course, the crux of the sale process, and within the valuation are two sometimes overlooked essentials: a detailed forecast and a detailed path to growth. Achieving clarity on these two related points boosts the seller’s possibilities and lifts the comfort level of the buyer.

Sellers who invest time and effort in developing a precise forecast for their business are doing themselves a favor because a focus of the buyer’s due diligence process is assessing downside risk. And assessment of downside risk can be described as determining the probability of future performance being equal to or greater than past performance, which makes a comprehensive forecast critical.

In my experience, buyers are always intent on growing a company they acquire, making a blueprint of how the next owner might pursue growth a crucial element of our CIM (confidential information memorandum). Historically, being able to emphasize this information has consistently made a material positive impact on valuation. On the flip side, I have seen many very qualified buyers looking at a harness company walk away because they could not see a way to grow the company.

In outlining the growth path there are, of course, no guarantees––especially because even the most well-conceived plan depends upon determined, effective execution. But the more strategic detail we can provide in the CIM, the higher the probability that a prospective buyer will incorporate this into his or her evaluation of the business. Predictably, I have been involved in a number of transactions where the multiple we achieved (valuation) was in large part driven by our ability to define a growth path in our CIM.

A backdrop for this discussion is a paradox: Forecasting can be consequential in the successful sale of a company, but I’ve observed that most harness company owners don’t do forecasting as a part of their methodology in running their business––just as it’s also unusual for owners to spend much time thinking about a growth path. And this disconnect strikes me as logical since in most instances owners of closely held businesses see little benefit in devoting their limited time on formulating a forecast or growth strategy. They are too consumed with the demands of operating the business, optimizing their cost structure, and managing the natural growth that flows from the customers they already serve.

The level of cooperation we obtain from sellers in developing a forecast or defining a growth path varies. In most cases, given the luxury of time, we are able to work through the details of preparing both a forecast and a growth plan. And when a seller simply can’t carve out the time required to help us create these two projections, that generally does not prevent us from getting a deal done. But those two missing elements do make it much harder to achieve an optimal sale price.