Dear Insider, 

At PSMJ’s M&A Advisory Practice, our M&A Team is in a crescendo headed towards the peak of activity: deal season before year-end. Today, I bring you news directly from our deals and discussions to help arm you in the world of M&A. If you are a buyer trying to create a new partnership, a seller in active negotiations, or you’re just determining the best time to dive into this market, here are two major considerations to hone your understanding of: Valuation and Vision. 

Valuation  

The numbers aren’t everything, but no deal happens without them. Do you know what number is fair for your firm? If you’ve tuned in to PSMJ’s previous M&A Insider issues, you know you must get that number out early in discussions. Whether buying or selling, you have to make sure you and the party on the other side of the table are in the same ballpark before you spend months of your time on discussions and potentially a small fortune in legal and tax advisory fees. It’s done with an exchange of financials, and an IOI. But how do you know the number is right?  

Most of the time, valuations are done in the lower and middle market in the A/E/C industry on multiples of adjusted EBITDA. But what period of time is valid for consideration in determining that EBITDA number?  Watch out for whether that EBITDA is taken on a weighted average of the last three years or on the last twelve months (LTM). The difference in the math is simple, the difference in the outcomes is stark: 

For example, let’s look at a company who has seen recent growth over the last three years from $2 million EBITDA to $5 million. With a weighted average of the last three years, their EBITDA for consideration would be $3.8 million and with a potential offer at 5x EBITDA the buyer would price them at $19 million. 

If the buyer had used an LTM to calculate their value, that EBITDA for consideration is $5 million, and thus would see a higher multiple as well, pricing in closer to $30 million on the offer.  

We have seen too many strategic buyers losing out to private equity buyers, private equity backed strategics, and larger privately held strategics on competitive acquisitions because they choose to base their pricing on a trailing three years instead of on an LTM. If you are a seller in a competitive position, make sure you are watching out for this key difference, and make sure you or your advisor have the right valuation method being used by your potential buyer. 

There are other considerations around what is standard and fair, but this issue of 3 years weighted average vs. LTM has consistently led buyers to lose out on deals. 

Vision 

In the realm of numbers, it is difficult for some strategic buyers to compete with private equity or private equity backed buyers in the space right now, but it is important to remember that there is more to a deal than the size of the check. Many of our sellers go for a lower offer with a firm that they believe is the better fit. In this realm, having a good understanding of how to present yourself as a potential partner either as a seller or a buyer is critical.  

At PSMJ’s advisory practice, we see a variety of approaches succeed, and others fall short. A successful vision for M&A for buyers is defined by an effective strategic planning process for the business. There is a clear goal, and the firm’s operations and strategy have been aligned towards this process and the eventual challenges that may arise during it.  

If you are ever considering selling, your vision for the transaction is based on knowing your goal for the transaction and how to identify what will meet that goal. If you want to achieve the best financial outcome, there are buyers who can meet that goal. If you want to sell into a firm to eventually lead it, that is an option too. There are many reasons why a seller pursues a transaction. 

Once the vision is set, and you’re ready to start conversations, you’ll want to get your deal breakers out on the table early. After that, getting from “OK, let’s talk.”, to being the partner they choose to close the deal with, takes showing that partner your clear vision of who you are and how your synergies together will get you further than either of you could get without this transaction. 

Verdict 

The biggest showstoppers for deals in this space continue to be these two factors: Valuation and Vision. If you are a seller, and a buyer’s valuation and vision do not align with yours, then there is no deal to be had. If you don’t know how to check your value, an M&A Advisory practice like PSMJ’s may be able to assist you. If you are a buyer who has put blood, sweat, and tears into fighting for a competitive deal, only to be told you weren’t selected by the seller because of the number, take a look at your valuation approach, and consider honing your vision to match. Successful M&A in this industry is built on effective matchmaking. After all, if you want to make it in this space, you’ll need your edge.