Tag Archives: valuation

Selling a company in 2020 does not mean selling it for a reduced price

The COVID-19 crisis has affected most sectors, including the M&A. Several entrepreneurs are asking how the value of their company has changed because of the crisis. To answer this question, we have to separate those firms that have the financial capacity to survive this crisis and those who don’t. The buyers are also aware of the fact that the crisis has affected all companies and they know that there might be delays in production or difficulties to sell or receive payments. Therefore, the investors do not consider the happenings of 2020 as a base for the value of the business. Currently, the value is determined more subjectively than objectively to facilitate selling the company for a fair price.

Importance of valuation dates
First of all, the valuation date has become more important than ever before. As the crisis is has affected the market and the situation of many companies negatively, the value of most companies was not the same in 2019 December, as in 2020 March, and probably it will not be the same in 2021.

Therefore, when determining the value of the business, advisers consider the value before the crisis, and the possible value after the crisis. They treat 2020 as an exception because of the unusual circumstances, as the change in value was not the fault of the business owners, there is no need to punish them.

Price is not equal to value
It is also essential to highlight that the value and the worth of a company are not the same. The price is the exact value of the materialization of a company at the moment of the sale and depends on the offer and the demand as well. On the other hand, the value is the monetary measure of the degree of utility that the company reports to it.

Therefore, just because the current value of the company is much lower now than a year ago, does not mean that the price of sale is reduced as well. The important is to find several buyers making offers and competing for the firm, so the company can choose the best option, maximizing the value of the sale.

Risk and Profitability
Buyers make their finical decision about the company they want to buy based on the risk and the profitability of the firms. If two companies are facing the same risks, they will choose the one with higher profitability. Some of the risks that buyers have to face because of this extraordinary situation are the regulatory changes or the loss of significant contracts. Nevertheless, these risks will disappear during the year of 2021.

It is also important to mention the risks associated with the cash-flows. We cannot talk about “risk-free” rate anymore, and the unsystematic risk has to include the extra risks because of the COVID-19. Besides, advisers have to rely on the middle and long projections, which might become true, or might not. The recovery of the sector from the crisis should be considered during the valuation, as it may vary by business areas. Also, it is recommended to calculate with the possible change in consumer habits because of the crisis, as it can affect the future profitability of the companies too.

The advisors should make analysis of the expectations of the future situation of the economy and the sector, using the most information at the moment of the valuation, with a goal of providing realistic image of the company. If you want to know how risk affects investment terms, read about it in our article.

Personal Reasons for selling a company
Last but not least, the personal reasons can affect the valuation process during the COVID-19 crisis as well. The decision of selling a company evokes emotions in every entrepreneur. If the sale is forced by the external environment, which can be the crisis, an illness or other reasons, it can be even more difficult to finally decide to sell the firm. The business valuation always depends on the personal reasons of the entrepreneur. The seller might want to fasten the process because of personal issues, but it can also occur that he has unrealistic expectations which make the procedure slower. The valuation is an instrument of negotiation, and the negotiation is a dance between the rational arguments, aiming for the best possible result.

To conclude, just because we are in a crisis now, it does not mean that it cannot be the perfect moment for selling your company. It is true, that the COVID-19 crisis has affected the business valuation and the sales process of businesses as well. However, as in every other area of life, we have to adapt to the new situation instead of letting it control us. The buyers and investors are also aware of the extraordinary situation and the M&A advisors continue searching for the best buyer for the firms and they do their best to determine the most appropriate price for both parties.

ONEtoONE Company Valuation Service
Having an accurate and comprehensive company valuation is very useful as it provides detailed information on the variables that underpin a business’s value. Company valuation is needed for buyers and sellers to during the sale process. For sellers, valuation is a negotiating tool that assists in the negotiation process. On the other hand, buyers should not accept the seller’s valuation, they should do their own. Our experienced advisors can help you to determine the value of your business, or the business you are planning to buy, to gain a competitive position in the market.

About ONEtoONE
At ONEtoONE we have a broad knowledge of the Mergers and Acquisitions sector, as we have participated in more than 1000 mandates. Our company is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company,
contact us.

The impact of COVID-19 on business valuation – Interview with Francisco Duato, Partner of ONEtoONE Corporate Finance

Francisco Duato, Partner of ONEtoONE, interviewed for Capital & Corporate, tells what are the changes that are going to occur in the M&A sector due to the pandemic, mentioning the most affected sectors, as well as the main opportunities for investors.

The COVID-19 crisis has forced many companies to adapt to the new situation. According to Francisco, the ability for innovation and digitization make it visible which sectors can continue to be interesting for investors and which ones cannot. Although the impact of COVID-19 on the M&A sector cannot be evaluated yet, operations show falls in the price of assets, according to current data.

The impact of the crisis on valuations:

Duato first indicates that, as a consequence of the pandemic, non-essential and essential activities suffered drops that have never been seen before, negatively influencing the companies’ valuation. Besides, the advisers still do not have visibility of the evolution of prices and valuations, since all this will depend on the effect of the second wave that is beginning now and will extend into autumn.

“The entrepreneur has to do his best to preserve the value of his Company, and M&A advisors have to sharpen the imagination to transfer most of the value to the transaction price,” explains the ONEtoONE’s Partner.

The advisors’ goal is to find a reasonable and satisfactory price for the seller and the buyer as well, and in this situation after the first wave of Coronavirus, this price may vary. However, if a company’s fundamentals were good before the pandemic, and they remain so in the new scenario, this should not penalize the valuation and the company’s price.

Change in deals in the M&A sector due to the pandemic

Duato comments that depending on the sector operations will fall, and others will be redefined. In affected sectors we are going to see many mergers of companies with high operating leverage.

In our Partner’s opinion, the most difficult part of the consultants’ job today is quantifying the impact of the pandemic on the different companies. As a solution, we have to focus on the strategic sense of operations rather than finances. The strategic decisions taken from now on will affect how the company gets out of this complicated situation.

Also, if we focus on making decisions about deals that had already started before the first wave of Coronavirus, it is a legal challenge. On the one hand, buyers protect themselves with Material Adverse Change (MAC) clauses, and on the other hand, sellers want to maintain the same price before the crisis.

The new situation has changed the decision-making process of investors, Duato adds. Now, when looking for opportunities, it is essential to know which sectors are of interest in this new scenario. Furthermore, not only must we take into account in which sector the company operates, but also to whom it sells.

Which sectors will see their valuations most affected?

According to Francisco, during the pandemic, large technology companies such as Amazon, Google, Apple, and Facebook have achieved outstanding results. Technology has allowed the digitization of companies and users, which has been fundamental in this crisis.

“Technology companies that know how to do well in cybersecurity, cloud services, artificial intelligence, collaborative software, internet, health or e-commerce, among others, will be clear winners, ” Duato says.

However, the tourism sector was the clear loser in this pandemic. Despite this, companies in this sector have a high potential for recovery, and because of this, experts advise keeping these assets.

Market opportunities

“The Covid-19, among other effects, has drained the liquidity of companies. In the first instance, the CFOs have focused on preserving the cash by resorting it to officially supported financing lines, but those that have survived this first challenge are facing a new one: solvency management. “, Explains Francisco

Liquidity is the ability to meet short-term payments and is related to the proper management of cash flows. However, solvency is the ability to meet long-term payments and is related to the management of the financial structure of the company.

“The approaches tend to vary greatly depending on the size of the companies. Large companies tend to know and handle the different alternatives well. However, the Spanish SME has traditionally been financed via equity, retention of profits, and bank debt. This is an ideal moment to reopen the debate on the advisability of diversifying the sources of financing and evaluating the options available in the market based on the specific characteristics of each company. It is time to overcome the fears of opening the shareholding to investors such as private equity, which in addition to financing, provides professionalization and support in management,” reflects Francisco.

On the other hand, our Partner comments on his opinion on the role of M&A in current and future times: “As we know, seeing changes in M&A takes time and is not usually the best option when immediate problems have to be solved.” However, he indicates, “not making all these reflections on time can lead companies to situations in which the only option is to turn to opportunistic investors. With this comment I do not want to discredit the work of the funds with a distress profile, they are a good option when we are facing a special or very deteriorated situation, but avoiding reaching that point and trying to maneuver in time is a shared responsibility of the entire management team.”

At ONEtoONE Corporate Finance we have created a podcast solving the most common doubts about our company valuation service.

About ONEtoONE

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Company valuation and investment risk - sharing formulas

Bridging company valuation disputes with investment risk-sharing formulas

Many private investment transactions do not close due to issues about how future business risks are allocated between the parties. Investors often want to take as little risk as possible, which leads to them offering lower entry company valuation. Company owners, on the other hand, often reject low company valuation on the ground that they do not capture the company’s future growth potential.

Rather than let these often opposing perspectives derail investment transactions, creative deal structuring can allow future business risk to be shared between the parties in a way that allows deals to get done and company valuation based on forward-looking risk analyses to be replaced with actual business performance.

How Does Risk Affect Investment Terms?

Investment risk has a major impact on investment terms. In many types of investments in companies, investment terms are based on company valuations. Company valuations, in turn, are often determined based on a company’s future cash flows, which are discounted back to the present through a consideration of the perceived risks related to those cash flows. The higher the risk is perceived to be, the lower the company valuation.
This is a major problem in investment negotiations, because apart from the natural economic inclination of parties to approach valuation in a way that favors their own interests, valuation is significantly complicated by the fact that no one can predict the future. This unavoidable inability leads to investors as well as company owners trying to convert the unknown future into an often rigid valuation formula, a process which in pure financial terms almost invariably works to the detriment of one of the parties.

IF YOU ARE INTERESTED IN LEARNING MORE ABOUT COMPANY VALUATION YOU CAN ALSO READ THE VALUE OF NOTHING – HOW TO ACCURATELY CALCULATE A COMPANY’S VALUE

While one might take the view that investment terms upside or downside that results from inefficiencies in valuation is an unavoidable part of the investment process, the reality is that, rather than causing one party to leave money on the table, these uncertainties often lead to investment transactions not closing. This is a problem that has significant negative implications, not only for companies and investors, but also the capital distribution infrastructure that lies at the base of every economy.

Risk-Sharing Formulas

An alternative to the zero-sum approach to risk allocation in discussing deal conditions is to design investment terms around formulas that allow risk to be shared rather than unilaterally assumed by one of the parties.

One common risk sharing formula is an earn-out. With an earn-out, a portion of the deal consideration price is deferred to the future and paid upon the company reaching certain agreed milestones, such as with respect to sales, EBITDA or net income. With this type of approach, the seller can effectively receive a much higher entry valuation based on strong company growth if the company can actually achieve that growth. If it can’t, the investor will not overpay for forecasted business performance that never occurred.

In addition to the earn-out, another approach that can be used is bonus or incentive payments that reward management in the event that agreed financial or operational thresholds are met. These types of formulas can allow the economic benefits of higher valuations to be replicated without putting in place complicated post-closing terms and conditions that can create legal and practical issues down the road.

Issues to Keep in Mind

Risk-sharing formulas such as earn-outs can be powerful tools to help bridge valuation disagreements in private investment transactions but there are issues to keep in mind to make sure that these formulas solve valuation challenges rather than create new ones.

Simplicity. The first issue is to make sure that the risk-sharing formulas that are used are simple, clear and easy to apply. The more complex that risk-sharing formulas are, the greater the risk that they will lead to disputes in the future.

Control. The second issue is level of control of the parties over risk-sharing formula drivers. If formulas are based on results that can be manipulated through operational or accounting techniques, the benefits of risk-sharing formulas can easily be lost.

Timing. A third issue to keep in mind is the timing of the implementation of risk-sharing formulas. Future risk is of course not fixed, and as the business moves forward in time the risks its faces will change, rise and fall. Accordingly, the further out in time a risk-sharing formula is structured, the greater the likelihood its utility as a mechanism to apportion risk and the economic benefits related to future business performance will fall.

While they need to be applied with care, risk sharing formulas can be helpful ways to bridge valuation disagreements in private investment transactions and increase the likelihood, not only that deals get done, but that get done on terms that are fair for all parties.

DO YOU WANT TO LEARN MORE ABOUT THIS TOPIC? HAVE A LOOK AT “WHAT IS MY COMPANY’S BRAND WORTH?”

This article was written by Darin Bifani. The photo for this article was taken by Leio McLaren on Unsplash.

The Value of Nothing – How to accurately calculate a company’s value

Words from one of Oscar Wilde’s plays, Lady Windemere’s Fan, have often come to mind during my 25 years in finance and business.

Wilde writes about two 19^th century upper-class Englishmen discussing the intrinsic nature of short-sightedness and cynicism:

Mr. Cecil Graham asks, “What is a Cynic?”

Lord Darlington replies, “A man who knows the price of everything, and the value of nothing.”

To which Cecil Graham quickly responds, “And a Sentimentalist, my dear Darlington, is a man who sees an absurd value in everything and doesn’t know the market price of any single thing.”

The value of something can be vastly different from its price

In business, as in personal life, the value of something can be vastly different from its price. When advising business leaders on corporate valuation, I found that they often misinterpreted price for value. Unfortunately, this often results in companies being bought and sold at prices that do not reflect their real market value.

Perhaps, in order to determine a buy or sell price, you have been involved in a “value audit” of a company’s operations. These audits parse a company’s performance numbers in excruciating detail, analyzing current and projected sales, return on sales/equity/debt/assets, debt load, inventory turnover, and debt-to-equity. They also consider the alignment of product with the needs, wants, and projected growth of the market. Supply, fulfillment, and operating performance numbers are carefully reviewed. This analysis then yields a price, which is later negotiated. As you can see, there is no sentimentalism here, with everything based on concrete numbers.

However, Lord Darlington is right. These calculated prices may only dimly reflect the company’s actual value. We have all been shocked by the prices paid for some companies. There have been sale prices that far exceeded or fell incredibly below an industry’s normal pricing multiples, even though financial analysis would have suggested otherwise. In such cases, buyers and sellers might have actually negotiated value, rather than price.

Don’t overlook factors crucial to a company’s sustained success and value

A few years ago, I was asked to help restructure the operations of a technology company that had just been purchased by a venture capital firm. Even though they had carefully completed due diligence on the company’s financial and operational performance prior to negotiating price, it soon became obvious that the company’s value to the new owners was far less than the price they paid. Why? Because they overlooked factors crucial to a company’s sustained success and value:

The Right Team: Does the company have the best possible leadership, management team, and workforce to effectively execute the corporate strategy?

The Right Skills: Does the workforce really have the skill set to tackle the challenges to come?

The Right Culture: Is the company culture healthy, with high morale? Does it support individual initiative, innovation, growth, and respect for other team members? Do team members feel that their roles are valued?

The Right Communication: Is there clear, meaningful, open, and normalized communication among the company teams to ensure continued learning and individual accountability? Does every team member understand and support the corporate purpose, vision, and mission?

The Right Assets: Will the technology and physical assets meet present and future operational demands?

The Right Structure: Do the company’s operating and organizational structures align with its corporate vision, strategy, and business model?

Had the venture capital team included these fundamental factors in its evaluation, it would have offered a significantly lower price, or not have submitted an offer at all. In other words, to accurately calculate a company’s value, considering the financial and operational numbers is necessary, but not sufficient.

Looking beyond the traditional numerical due diligence parameters allows buyers to best calculate the true value of a company to them and sellers to justify a higher asking price. In Lord Darlington’s terminology, it is essential to fully understand a company’s value before you can determine its price.

Article written by Paul Hager, Partner – ONEtoONE Corporate Finance USA.

Want to read more about companies value and due diligence? Have a look at “WHEN YOU LIE SELLING YOUR BUSINESS.”