M&A Activity -- Expect a Surge in Mergers
What Is My Company Really Worth?
Sellers must develop a reasonable and obtainable expectation for the value they will receive for their company. Prices determined solely in the minds of the selling shareholders are frequently subjective, biased and unrealistically high.
Often sellers falsely "hope" that buyers will pay for their sweat equity, some mysterious value associated with a misunderstanding of goodwill or their company's future performance. This mindset can be, "Well, we've lost money for the past five years, but now we're poised for enormous growth and profits." Buyers are not willing to pay for future performance.
Profitable Company Valuations
Sellers are best served by seeking a professionally prepared market valuation for their company. These valuations, among other things, will be based on current market conditions and prices paid in comparable transactions.
A professionally prepared valuation will also examine the valuations placed on selected publicly traded printing companies. It will use capitalized earnings analysis to estimate the value of the seller's company by capitalizing current earnings (usually the trailing 12 months). The valuation will also seek to "normalize" earnings by adding back to or adjusting earnings for cost that disappear if the company is sold. These addbacks can include excessive owner's compensation, non-performing family member compensation, excess rent paid for plant real estate held "off the books" by the shareholders, the effect of equipment operating leases and other non-recurring expenses that presently depress earnings.
The valuation should also consider the effect and potential risk of excessive account concentration and any other risks the business faces in the near term. Chief among these other risks is the loss of present management and/or sales post-transaction. Companies that have deferred needed equipment and are faced with significant, near-term capital expenditures will find their valuation penalized.
The valuation will result in an estimate of the company's market value in terms of its total capitalization of debt and equity, and will be stated as "Total Enterprise Value." Total enterprise value is the sum of all funded or interest bearing debt plus the equity the sellers will receive at closing. This is also referred to as the Total Consideration that will be paid to the shareholders and lenders at closing.