The business environment we are facing nowadays is becoming increasingly challenging to growth. Our today’s publication talks about one of these growth strategies. It is known by its Anglo-Saxon term M&A, (Mergers and Acquisitions).
Too often, either the specific sector in which a company operates is exhausted, or it is difficult to gain market share in it. Sometimes this is due to competition (current and potential); in other cases, the presence of substitute products or services are the barriers. Hence, many companies choose to go for a diversification strategy of their business. They do this in two ways:
Related diversification. Products or services related to their branch. For example, if I sell mattresses, I will also sell pillows, or if I provide services as a car workshop, I will sell trucks, too.
Unrelated diversification. The classic strategy in our country: I am a company that sells consumer goods, now I also would like to deal the real estate business.
What is M&A?
There are many ways to start the diversification. One of the most widespread strategy is to do so through acquisitions or mergers with other companies that are already established in the branch or sub-sector we want to target. This is known as M&A, Mergers and Acquisitions.
This process has the advantage of acquiring a company that is already established in the sector. This avoids a start-up from scratch with all that this entails. The established company already has expertise, a portfolio of clients and other elements, which are usually the most costly when starting a business.
Step 1 in M&A: Valuation of the company
The M&A process has to start with a valuation of the company we are interested in. Obviously, if we are going to "buy" something, we have to know how much it is worth. Therefore, a valuation report from an independent analyst or expert is essential, in addition to other issues that we address in our post Buying and selling companies, topics to take into account.
Company valuation methods
Although there are a multitude of valuation methods, the most widely used and universally accepted in the financial world are:
Discounted cash flow valuation (DFC). This method assumes that the past is relevant but that what is important for a company is its future. The validity of this method depends on the degree of reliability of the forecasts we can make about what the business will generate in the future and many factors come into play. Despite its complexity, it is the most correct method; someone does not buy a company knowing is not going to generate anything in the future, even if it has done so in the past.
Valuation by multiples. This method consists of estimating a business value by comparing it with similar companies, with the sector, with the company itself in the past, analysing past transactions of similar companies... and thus obtaining an estimate of what would be a reasonable price in the form of multiples of EBITDA normally. If the company "next door" sold for 10 times its EBITDA for the year, the one I want to buy should be for a similar price. Of course, as long as benchmark transactions can be found (this can be difficult for unlisted companies), it is a much faster method and that is an advantage. The disadvantage is that it takes into account the past and not the future, although this method can be interesting as a complement to the previous one.
Step 2: Negotiation and contract drafting
Once the valuation of the company is clear, then the whole part of negotiation, drafting of contracts... to complete the operation follows. But without a prior valuation that allows the use of reasoned and objective arguments, it is certainly not possible to sustain a coherent M&A strategy.
Our expert staff at Carrillo Asesores Tributarios y Abogados SLP mirrors on the whole chain of tasks necessary to maximize the M&A strategy of your company. It starts with the valuation and analysis of a company. After this, a draft and/or review the drafting of documents and commercial contracts follows. We also act as your face-to-face assistance in the negotiation.
Ensure you have access to the resources necessary to strive for success. Reach out for us!
