Companies driven by growth strategies need to consider mergers and acquisitions, especially when the following motivations exist:

• To capture operational synergies
• To grow market share or access to distribution channels, markets or products
• To provide new capabilities, technologies or talent

Opportunities exist when “targets” provide:

• Increase scale
• Broadened product and service offerings
• Geographic expansion
• New capabilities
• Enhanced brand management
• Improve positioning in the value chain and/or
• Customer experience

Opportunity meets need (i.e. timing), when strategically fit targets are available, when market conditions are favorable, and when financing is accessible to fill the growth strategy of an enterprise. There are many drivers in the sale of middle market companies; unfortunately, few business owners have the available luxury of determining the right time to sell their business at its maximum value. Timing a sale should not be entirely out of the question for business owners with the help of their trusted advisors.

Business owners contemplating an exit from their business should begin the transaction process by engaging an experienced M&A Advisor to perform a Calculation of Value. Although the requirements for a calculation engagement may be more limited than for a valuation engagement, business owners should expect an efficient and systematic approach to the calculation of their company’s value. Most effectively used on the sell-side of a transaction, calculation engagements typically possess the following characteristics:

• Scope limitations; more narrowly-focused
• Reduction of costs (relative to a formal valuation)
• Mutually-agreed upon valuation approaches and methods
• Mutual determination of the extent of procedures to be performed
• Calculated Value expressed as a single value or value range

A thoroughly executed calculation of value will serve as the reference point for business owners and their respective M&A Advisor moving forward in the transaction process. Calculation engagements also provide business owners and their advisors with a platform to clarify the owners’ goals, align owners’ expectations with marketplace realities, determine whether a sale is the appropriate course of action, identify opportunities to maximize the sales value, and eliminate surprises during due diligence/close.

The Alliance of Merger & Acquisition Advisors (AM&AA) is the premier international organization serving the educational and resource needs of middle-market M&A professionals. AM&AA surveys its membership annually to provide insights into sell-side transaction multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA) and sell volumes completed in the second half of 2014; generating The Deal Stats Transaction Survey.

Based on the survey, average and median multiples for done deals have risen; the average multiple increasing from 5.52 to 5.64 times EBITDA and the median multiple increasing from 5.12 to 5.37. Also, the total number of deals has increased, and transaction dollar volumes have remained above historical levels. Average EBITDA multiples by industry were: Construction – 4.87; Manufacturing – 5.68; Wholesale Trade – 6.54; Retail Trade – 6.02; and Professional Services – 5.32.

The traditionally positive relationships between EBITDA multiples (higher), transaction size (total consideration), and company revenues were observed in this Survey as well. The principal reason cited by the members of AM&AA for companies with higher EBITDA multiples – higher growth opportunities and high synergy possibilities for the buyer.

A major point of contention between buyers and sellers in M&A transactions is the purchase price. Earn-out agreements provide buyers and sellers with an effective technique to “bridge the price gap.” Although opinions and experiences vary widely, carefully structured earn-outs can mitigate risk and successfully meet the needs of both buyers and sellers. Risk reduction opportunities permeate throughout earn-out agreements and may include (but not limited to):

• Performance metric selection – must be verifiable, well-defined, universally-understood
• Negotiate caps and floors – guarantees a minimum or limits total consideration
• Security arrangements – hold a portion of the earn-out in escrow, request a lien on company assets/shares, request guarantee from bank/parent company
• Engage external financial and legal resources proactively – use of legal and financial professionals on the front-end averts surprises post-transaction

Eliminating risk in its entirety may be an unlikely proposition; however, buyers and sellers, equipped with experienced professional advisors and the will to close, can minimize risk and execute a mutually-beneficial earn-out agreement.