Beauty is in the Eye of the Beholder

Business buyers will evaluate key attributes of the selling company. They will closely scrutinize the selling company’s industry dynamics, its financial performance, its client base, growth potential, management team, and the overall size of their investment. How these elements impact pricing will depend upon the type of buyer that you are dealing with.

There are no hard-and-fast rules about whether you’ll get a better price from a financial, industry, or strategic buyer. For clarity, Kaulkin Ginsberg defines strategic buyers as operating companies from another, typically related, industry that will acquire businesses to diversify its services and/or client base. Financial buyers, also known as buyout firms, typically acquire majority control of businesses with the goal of increasing shareholder value by making add-on acquisitions and reselling their stake at some point in the future. Industry buyers are companies that acquire other businesses from the same industry, typically for expansion purposes.

Regarding mergers and acquisitions (M&A) in the accounts receivable management (ARM) industry, a financial buyer may be prepared to pay a higher price for a company their view as a platform acquisition that will get them into a new industry. Remember, financial buyers, by definition, do not have an investment to leverage in that particular industry so they have to approach the acquisition on a stand-alone basis. An industry competitor, by contrast, may be only interested in one aspect of the selling company, such as its customer base. If so, the competitor will price the business according to that aspect’s value to him, ignoring the business’s overall worth.

Availability of financing may also play a critical role in determining the pricing of an acquisition. Pricing tends to be higher overall in markets where financing is readily available and interest rates are low, compared to markets where lenders are more conservative. Availability of financing is relatively more impactful upon financial buyers’ pricing capability, compared to that of industry or strategic buyers.

The role the owner will play with the company post-sale may also impact pricing. If the owner leaves the company upon its sale or after a short transition period, a buyer may be more inclined to cash him or her out. However, if the owner continues to run the business after it’s sold, he/she may have a chance to take a “second bite of the apple” if the company is later resold. Generally, the original owner sells his remaining interest when the buyer cashes out. This is most common among financial buyers; however, it also occurs among some industry and strategic buyers that are positioning for a sale of their own at some point down the road.

There are many factors that influence pricing during the transaction process. Fortunately, Kaulkin Ginsberg can help you navigate those choppy waters. We have worked with small, mid-sized, and large privately-owned companies, Fortune 500 corporations, and financial investment firms on their ARM M&A strategies for thirty years. Whether you’re seeking professional sell or buy side representation, a defensible valuation, or sound strategic advice, Kaulkin Ginsberg is uniquely qualified to assist you. For more information or to schedule a confidential discussion of your business goals, email us at hq@kaulkin.com.

About Kaulkin Ginsberg Company
Since 1991, Kaulkin Ginsberg Company has provided critical strategic advice to the ARM industry. Our client-centric approach covers almost every stage of a company’s life cycle and enables us to maintain longstanding relationships as trusted advisors. We provide mergers and acquisition advisory, strategic consulting, and valuation services.

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