Most business valuations calculate the value of a private company using fair market value, and this value is rarely suitable for making investment and financing decisions. Fair market value, although compliance-oriented and theory-based, fails to consider a business owner’s objectives or reasons for a transaction. The type of transaction will determine the owner’s exit channel, and the exit channel will identify the buyer or investor. Therefore, private company value is relative to the exit channel and the buyer or investor type, and may encompass numerous correct values at the same point in time! Each exit channel has a different value, and these values may include:

• Synergistic value – value to strategic buyer
• Financial value – value to investor (minority, management)
• Collateral value – value to bank from repossession
• Incremental business value – value added from an investment
• Fair market value – value to IRS or Courts
• Others – Insurable, Public, Fair Value

According to Robert T. Slee, an investment banker and influential author of Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, US private markets operate on a 10-year transfer cycle, and mid-market companies are currently in the midst of unprecedentedly high valuations and a pre-recession earnings boom (Seller’s Market). Slee’s corroborated data suggest that this prime selling time will begin to diminish towards the end of 2017, transitioning into a period of uncertainty until 2020 (Neutral Market), followed by a period of deal recession (Buyer’s Market) through 2023 before returning to current market levels again.

Private equity groups (PEGs) insatiable appetite for deals at above-average multiples remains undeterred, and stagnant, large corporations continue to look for growth through acquisitions of mid-market companies. With the largest demographic of mid-market business owners between the ages of 54 – 58 and more than a quarter of a million Americans turning 65 every month, the time to formulate and implement a comprehensive exit strategy is now!

Whether it’s selling to a PEG, a strategic, or watching your “baby” flourish, Allston Advisory Group has the experience to assist you with the desired transaction for your business.

Generally Accepted Accounting Principles (GAAP) are a framework of accounting standards, rules and procedures defined by the professional accounting industry. No single reference source exists for all of GAAP; briefly, the sources of GAAP are:

• Accounting principles promulgated by the American Institute of Certified Public Accountants (“AICPA”) including Financial Accounting Standards of the Financial Accounting Standards Board (“FASB”), FASB Interpretations, Accounting Principles Board (“APB”) Opinions, and AICPA Accounting Research Bulletins.
• Pronouncements of AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and Technical Bulletins issued by the FASB and the Emerging Issues Task Force.
• AICPA Accounting Interpretations and practices that are widely recognized and prevalent in the industry.
• AICPA Issues Papers, pronouncements, textbooks, literature and articles.

GAAP provides a range of reasonable alternatives for identical transactions. M&A transactions values are negotiated based on historic and/or projected financial results, and only GAAP prepared statements will suffice. However, in the Middle Market, GAAP prepared statements don’t always exist.

The situation is more complicated for both Buyers and Sellers when providing and accepting the representations and warranties of the financial statements. Buyers must be prepared to deeply scrutinize the financial statements.

Upon execution of the Letter of Intent (LOI), buyers and sellers kick-start the due diligence phase of the mergers and acquisitions (M&A) process. Due diligence, a most critical step in the M&A process, provides buyers the opportunity to confirm the seller’s financials, determine the risks, establish the potential benefits and understand the overall strategic fit. Successful transactions depend on a streamlined due diligence process; consequently, experienced M&A advisors, on behalf of the seller, will establish a well-organized Virtual Data Room (VDR) to serve as the conduit for sharing information and expediting the confirmatory process.  VDRs provide:

• a secure environment to share sensitive data
• the ability to manage the information exchange process
• control over timing and accessibility
• permission to print documents for review
• email notifications to buyer’s counsel as documents are continually added during the process

The due diligence phase will always serve as a critical function of the M&A process. A seasoned M&A Team will be primed with the VDR long before the LOI is signed; ensuring a smooth and efficient process to the benefit of both parties privy to the transaction.

Investment bankers have access to an array of industry-specific data, statistics, and analytics; however, the most comprehensive understanding of a business’ nuances originates from sincere collaboration between sellers and their trusted M&A advisors. No two businesses are alike; therefore, sellers must carefully select an experienced team of investment banking and support professionals. A qualified advisory team knows how to collaborate with the seller and each other to ensure that no stone of value be left unturned in the structuring of a successful transaction.

Some sellers forgo the expertise of a veteran M&A advisory team; choosing instead to represent themselves. This unfortunate seller mistake is most commonly due to misconceptions about an M&A advisor’s roles and responsibilities (i.e. only a “Matchmaker”), an attempt to avoid the perceived cost of an M&A advisor, or to pursue a “substantial” offer currently on the table. In most cases, self-representation denies sellers the offer they never received, the financial sum they left on the table and the exponential economic gain realized in comparison to the fees paid to the investment bankers.

The most successful deals are almost always the result of collaboration between sellers and their trusted M&A advisors.