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SME M&A Guide: Bridging Business Valuation Gap between Buyer and Seller

Updated: Sep 1, 2023

One of the main stumbling blocks in the M&A process is the business valuation gap. This is the difference between the buyer's and seller's perceived values of a business. As with any negotiation, both sides will have their perspectives. Fortunately, there are tried-and-true methods to bridge this gap, ensuring both parties walk away content. Let's explore these mechanisms in depth.

Earn-Outs: Performance-Driven Payouts

  • Purpose: A commitment from the seller to meet specific milestones post-acquisition.

  • KSF: Transparent metrics setting, continuous performance monitoring, and aligned incentives.

  • Example: When Google acquired Postini, the deal was structured to align with performance targets, guaranteeing the seller's continued dedication.

Stock Consideration: Shares Over Cash

  • Purpose: A stake in the future of the acquiring company, promising a share of potential successes.

  • KSF: Accurate valuation of shares, transparency in stock distribution, and post-merger stock performance.

  • Example: When Facebook acquired WhatsApp, the deal heavily featured stock considerations, betting on the collective future.

Contingent Value Rights (CVRs): Event-Based Rewards

  • Purpose: Future payments dictated by non-financial milestones.

  • KSF: Clear definition of triggering events, monitoring systems in place, and agreement on CVR terms.

  • Example: Sanofi's purchase of Genzyme came with CVRs, linked to the success of a particular drug.

Seller Financing: Showing Faith in the Future

  • Purpose: The seller backs the future potential of the business by offering a loan.

  • KSF: Fair loan terms, commitment from the buyer for repayment, and monitoring of business health post-acquisition.

  • Example: Smaller businesses frequently resort to this, affirming belief in sustained success.

Deferred Payments: Staggered Settlements

  • Purpose: Alleviating upfront financial burdens.

  • KSF: Transparent payment schedules, fair interest rates, and financial stability check post-merger.

  • Example: Many private transactions in volatile markets lean on deferred payments, offering a cushion against immediate financial strains.

Escrow Arrangements: Safekeeping Fund

  • Purpose: A protective measure to address valuation uncertainties.

  • KSF: Agreement on the escrow amount, clear conditions for release, and mechanisms for dispute resolution.

  • Example: In the tech world, escrows are a regular feature, ensuring smooth transitions, especially for intellectual property.

Rollover Equity: Maintaining a Stake

  • Purpose: Sellers keep a vested interest in the company's trajectory.

  • KSF: Agreement on equity percentages, clear terms for equity conversion, and post-acquisition business health monitoring.

  • Example: When Blackstone bought Refinitiv, the original investors opted to retain some equity.

Adjustment Clauses: Reactive Revaluations

  • Purpose: Catering to fluctuations in asset values.

  • KSF: Mechanisms for regular re-evaluation, clear metrics for adjustments, and transparent communication between parties.

  • Example: Industries dealing in commodities, prone to price swings, frequently use these clauses.

Clawbacks: Post-Deal Safeguards

  • Purpose: A safety net against post-deal surprises.

  • KSF: Clear criteria for triggering clawbacks, mechanisms for monitoring post-deal surprises, and mutual agreement on terms.

  • Example: This mechanism becomes crucial in deals where there's a risk of future penalties or fines.

Open Dialogue and Trust: Beyond Contracts

  • Purpose: Pioneering unique solutions via mutual trust.

  • KSF: Mechanisms for open feedback, mutual respect and trust-building activities, and alignment of broader visions.

  • Example: Collaborations between tech startups and industry giants often thrive on this principle, with both sides aligned on a shared vision.

Bringing It All Together

Navigating the M&A labyrinth demands more than just fiscal prudence. It's about building bridges – between valuations, between cultures, and between visions. As demonstrated, various tools can help ease these transitions, but nothing beats open dialogue and trust. Embrace these strategies, and mergers can go from a tactical move to a transformative leap forward, promising sustained growth and unparalleled synergies.



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