Consulting M&A - Business Valuation

For every planned M&A transaction there is a cause, a reason or a wish to reach a goal. In the case of a company acquisition (company succession), it can be tried to skip the process of founding a company which can be linked to a long start-up phase. A company sale, the counterpart of a company acquisition, can be undertaken because of retirement. Also, other reasons, for example reluctance, are imaginable. Through a company merger, synergy effects might be exploited or one might expand in the international context in the first place. A company demerger can be caused by a disruption between shareholders or because a company grew too large (monopoly).

Whatever might be the case, it is vital to check if the objectives can also be reached by other means which might provide a better solution. Is the acquisition of a company a better solution than a start-up? Can the objectives of a company sale also be solved by a third-party manager, or is consulting necessary for solving an actual deeper and structural problem? Is a merger better than the sole acquisition of a company or a start-up? Might the initial problem, in the case of a company demerger, be solved by good consulting? Before an M&A transaction is carried out, there has to be a careful balancing between the pros and cons regarding the given objectives.

After having rechecked the objectives of the M&A transaction, the business and its environment have to be analysed. Consecutively, a projection might be conducted. The business valuation will be based on the projection.

The environmental analysis especially includes the global environment and the task and competitive environment. Here one should focus on important factors. Data are provided by national static bureaus, the Chamber of Industry and Commerce, the World Bank and similar sources.

A business analysis can be organised either by the functional or the value-added approach. Here one relies on internal company data which are mainly provided by the (management) accounting. Based on the analysis, a projection of the company can be conducted.

Due diligence includes, next to an environmental and business analysis, legal and tax-related aspects. Therefore, due diligence is an integral part of a transaction and with this part of an M&A consulting. In practise this is done in partnership with external consultants. Every contract affected by the M&A transaction such as articles of association, loan agreements and rental contracts has to be reviewed.

Building upon the projection of the company and its environment, a business valuation is conducted. A valuation can be based on different methods. These include, for example, the approach of functional business valuation, the DCF-method, the capitalised earning method and multiplies. Not all of these methods are equivalent, but all should be calculated for reasons of argumentation. The approach of functional business valuation is suited the best for calculating the decision value, because withdrawal preferences, other cash flows and taxes can be taken into account.

Technology has progressed fast and this enables one to value the business simulative. This means that not only one but thousands of company values are calculated and one has a value as bandwidth together with a probability distribution. Here, different environmental and business developments are taken into account.

The company value (decision value), depending on the model (acquisition, sale, merger, demerger), can be expressed either as price or as marginal rate (quota). The price can also be stretched over a period of time, to say as instalment or annuity. For a company succession, this might be reasonable. Information on this topic is found in the given subsection.

An M&A transaction includes not only an environmental and business analyses and a business valuation but there are also a lot of practical questions. There are organisational questions like how the company should be restructured and how to implement a new strategy on cooperate level. Next to this, there are also legal and tax-related questions.

During my studies, I acquired a deep understanding of the subject of tax planning, also regarding conversions and their fiscal consequences. However, I’m not a tax advisor and I don’t give tax advise. The given questions can be worked out together with a tax advisor and a lawyer. I prefer doing this with the people the company worked with in the past because they know its history the best. Relying on them is good practice for error prevention.

After having gone through the various steps of preparation (analysing the company and its environment, business valuation, and a first legal and fiscal check), it’s time for negotiating. If you are not an M&A consultant, an M&A transaction is conducted rather rarely. Therefore, a few things have to be considered.

Negotiations can become quite emotional and this can cause issues. One might take decisions too fast. Or one passes information unintentionally. There might be points of negotiation, one gives in but actually did not want to in the beginning. Before the negotiation starts, it is vital to recheck one’s personality. It can be wise not to negotiate alone. For this reason, I will be at your side, if desired. Next to this, the business valuation should be updated if new proposals arise.

After successful negotiations, in cooperation with a lawyer and tax advisor, the legal part of the transaction has to be done. My focus is on the coordination of the M&A transaction and the business valuation. External consultants (law, taxation) are especially important in an international context.