The Art of Establishing a Transaction Price Target

In a previous discussion, we highlighted the attributes of a formal business valuation and spoke to the extreme usefulness of such a valuation.  But we also proposed the idea that arriving at an appropriate M&A transaction price target is “as much art as science”.  So in this post, we focus a bit more on the art than the science of setting a proper price target for an M&A Transaction.

After all the financial analysis is completed, the value of the assets is determined, the relevant market comparable deals and multiples have been evaluated and the industry analysis and economic outlook data has been applied in considering the value of a company; when then must turn our attention to maximizing the transaction price of a company through less scientific means.  This involves considering the seller’s business from two primary but different perspectives:  the intangible aspects of the business that drive value and the acquirer profile that will most likely yield the best possible outcome for the seller.

The intangible aspects of a business that can drive additional value include:

• Name recognition and strength of the company’s position in its market space
• Strength of the management team that will remain with the company following the transaction
• Clear growth channels or untapped growth opportunities upon which a new owner may be able to capitalize
• High-value customer relationships or market entry points
• Differentiators that give the company a unique competitive advantage

From the acquirer-profile side of the equation, it is critical to identify and engage prospective acquirers that have a clear reasonto acquire the seller’s company.  This reasonis often the difference between an offer that conforms to market norms and an offer that reflects the maximum value of the company.  Acquirer attributes that lead to enhanced transaction prices may include (to name only a few):

• Existing holdings in the seller’s market space that present unique opportunities for the acquirer to accelerate the growth of the company
• Unique and in-depth operational experience in the seller’s industry that creates a more favorable risk profile for the acquirer, as opposed to a general financial investor that may not as readily understand the nuance of the industry
• Overlapping and/or complementary product lines, customers and distribution channels
• Cost synergies that can be achieved by combining the seller’s company with existing holdings or at least operate cooperatively with the acquirer’s existing holdings

No advisor can guarantee that he or she will deliver the “maximum value” for a seller’s company. But an advisor can go beyond the mathematics of valuation by defining and highlighting the often value-rich intangible attributes of a seller’s company and by matching the seller with an acquirer that has compelling reasons to acquire and own the seller’s company.