Selling Your Business to a Strategic Buyer

01 Dec

By: admin

Articles / Blog

Comments: No Comments

When selling your business to a strategic buyer, a principal objective should be to identify the incremental value of the synergies created by the merge of the two entities and capture as much of that value as possible. The first step in extracting the value of the synergies is to estimate the dollar amount of value created from the synergies. As stated in the last article, synergies can come from various places such as Cost & Risk Reductions, Process Improvements, Revenue Augmentation and Economies of Scale. According to The Boston Consulting Group, 94 percent of merger announcements which disclose the value of synergies mention only cost synergies or don’t mention the specific nature of the synergies at all. 1 The principal reason for the foregoing is that cost based synergies are the easiest to quantify. For example, estimating savings from eliminating administrative redundancy, consolidating operations and increased purchasing power are relatively straight forward.

With the above stated, bolt-on acquisitions completed by larger companies often result in substantial revenue synergies. Many larger companies acquire smaller “bolt-on” companies in order to add complimentary products to their offerings, which their sales people sell to the existing customer base. Furthermore, cross selling opportunities, the potential to sell both company’s products to the other company, can materially increase the Buyer’s revenue.

According to a 2012 study performed by Thompson Reuters, transaction synergies from a sample of 365 deals with values of more than $300 million that took place from 2000 – 2011 range from 2 to 10 percent (depending on the industry) of the target company’s latest annual sales, with a median of 4.8 percent (refer to chart below). If we assume that a similar level of synergies exist with lower mid-market transactions (i.e. transaction values less than $100M) we can infer that the synergies contribute an additional 50% or so to a typical small company’s EBITDA.2 But what if the Buyer generates billions of dollars of revenues in your market. Simply dropping your products into the hands of their salespeople can result in increasing your Company’s sales by a magnitude!

Source: Thomson Reuters Data Stream

Another statistic of the aforementioned Thomas Reuters study is the median amount of synergies captured by the selling company and reflected in the transaction price is 31%. When we multiply this 31% by the approximate 50% of incremental value created by the synergies, we can estimate that the average amount of transaction premium captured by Sellers from synergies is approximately 15%. This infers that a 5X EBITDA mutiple (a typical small company multiple paid for companies which have an anticipated 10% CAGR) would increase to 5.75X when sold to a strategic buyer with average synergies. It is important to note that the 31% statistic is based upon transactions values in excess of $300 million. Sellers of such transactions generally employ seasoned transaction advisory professionals where Sellers of lower mid-market (< $50M) transactions, and especially those executing transaction less than $20M generally do not have such transaction expertise.

Accordingly, it is our observation that most Sellers of smaller transactions (< $20M) see little to no increase in value due to synergies resulting from a sale to a strategic buyer. From our perspective, this is unacceptable.

There are a magnitude more potential financial buyers then strategic buyers, so why search for a strategic buyer if the Seller is not going to benefit from the synergies! In fact, the 31% of the total synergies which are captured by the Seller is also unacceptable to us. By effectively preparing the company for a transaction, studying the Buyer’s operations to enable a reasonable estimate of the value of the potential synergies and by applying seasoned negotiating skills one should be able to grab much more than the reported 31% of the synergistic value.

Don’t settle for little to no share of the synergies, let alone the average 31%. Sign up to receive the LockeBridge Newsletter to get the next articles in which we will discuss, how you (the Seller) can grab more than your fair share of the synergies created.

  1. March 27, 2013; Jens Kengelbach, Dennis Utzerath, Christoph Kaserer, and Sebastian Schatt; How Successful M&A Deals Split the Synergies.
  2. Assumes that a typical EBITDA margin of a well run company is 10%.