This article is part of a comprehensive series exploring buyer value creation. You can download the complete guide here.
As value and transaction advisors, we collaborate with business owners to enhance their company’s overall value before a transaction occurs.
Our approach involves a multi-month process that includes implementing significant changes, professionalizing the management team, and clearly defining the company’s strategy. Additionally, we improve back-office operations to ensure accurate and timely financial reporting while providing insights into operational performance.
Ultimately, our value advisory efforts aim to help achieve the highest possible purchase price during the sale process. It’s important to note that value creation is not solely the seller’s responsibility; buyers also evaluate target companies based on the future value they can generate and realize downstream.
When buyers consider purchasing a company, they develop a deal thesis—a clear rationale outlining why the acquisition is strategically and financially justified. A primary objective for the buyer is to achieve a return that justifies their capital investment. For the investors involved, this means realizing a financial return through the eventual sale of the acquired business, downstream monetization of the acquiring company, or the upside generated from a longer-term hold of the acquired business.
In any case, a buyer must envision the potential benefits of the transaction. A well-positioned seller can assist the buyer in shaping this vision or deal thesis, which improves the likelihood of success pre- and post-transaction.
What is Value Creation, and How is it Measured?
Value creation refers to the process of developing both tangible and intangible assets within a business. It can be quantified in real dollars, which helps to determine the company’s worth. The most commonly used metric for assessing value is Enterprise Value (EV). Enterprise value represents the total value of a company.
For privately held companies, EV is typically a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) or revenue based on the sales figures of similar companies within the same market segment. A private company’s value is further established during the sale process, frequently through an auction. Engaging in value-creation activities can increase EBITDA, leading to higher market multiples.
Value creation occurs between sellers and buyers when the seller provides a clear strategy. By positioning the company as a platform or identifying operational opportunities, the seller can help shape a compelling deal thesis. However, time and funding constraints may limit the implementation of these opportunities before going to market. Suggestions like entering a complementary market or productizing a service may take time but can lead to significant revenue growth. The selling company’s Confidential Information Memorandum (CIM) outlines these potential opportunities to help buyers identify value prospects.
Buyers can review the strategies presented to evaluate how they fit into their deal thesis. Buyers will most likely map value to the following (partial list):
- Synergies – cost rationalization post-sale helps create financial synergies – this may involve eliminating duplicate departments or functions such as accounting or human resources. Synergies may also result from vertical integration or the acquisition of underutilized assets. Synergies effectively buy down the cost of the target – for instance, reducing the cost of acquisition from a 5x to 4x multiple. Cost rationalization can help drive improved financing terms and result in an accretive rather than dilutive transaction on day one.
- Expansion and Diversification – Buyers frequently aim to enter new markets or increase their existing market share. To achieve these objectives, they often pursue inorganic growth strategies. For example, acquiring a ready-made entry into a new market can be quicker, less costly, and less risky than expanding organically. Additionally, expansion and diversification can help reduce concentration risk, meet market demand, or enhance profit margins. Buyers experiencing slow organic growth look for inorganic options to boost revenue growth.
- Competitive Advantage and Margin Growth – Buyers may seek to acquire a strong brand, new or advanced technology, specialized skills, or teams or to minimize competition by buying a competitor. Acquiring a competitor can also result in gaining new customers and expanding its footprint (geographic, demographics, etc.), acquiring valuable intellectual property or technology, and expanding into new markets.
About SD Capital
SD Capital is a premier, full-service, value advisory and investment banking practice that assists middle-market companies in creating and maximizing business value. We provide strategic evaluation and execution of various downstream sales and monetization pathways. With decades of combined executive experience running, owning and advising private companies our team is uniquely positioned to guide owners through the complex process of growing and selling their companies.
Learn more at www.sdcapital.com or contact the team directly at [email protected].
Schneider Downs Capital LLC is a subsidiary of Schneider Downs & Co., Inc.
