If you are contemplating a merger or sale of your business, who should you consider as potential candidates? Firms that possess these characteristics:
- Synergistic or complementary domain expertise
- Carrier relationships (preferably not duplicative)
- Compatible technological capabilities
- New sales channels or markets
- Compatible management style, business model, structure and corporate culture
- Shared vision for the future of the business
Start with firms that you already know, whether they might be friendly competitors or businesses that may have some synergies with your own practice. Do you market complementary product sets? Do you serve different markets? Does each team possess expertise in a different business discipline? And, do your strengths and weaknesses complement each other? Having the same weaknesses could be a formula for disaster.
Also see: "How to become a human capital consultant."
Perhaps the partnering firm has a desirable proprietary technology that would improve efficiencies or facilitate the opening of a new sales channel. Or it could be that both firms do not have much management bench strength; however, the combined entity might be quite strong and multi-faceted with great domain expertise.
Are the business models, marketing strategies, compensation plans, producer contracts and corporate cultures compatible? Perhaps equally important is when they are not compatible, what will be done about it?
You need to also realistically consider what your business is worth as a starting point for any discussions with third parties. Certainly having an independent appraisal done is essential, particularly if you have not been previously involved in many business transactions.
Where to start
When considering the valuation of your business, the starting point is adjusted net cash flow, including “put-backs” for personal preference items. Another element is your client retention and the value of your renewal business. High growth firms are awarded a “premium” in terms of their valuation. You should be thinking double-digit compounded growth if you expect to command a premium to market value in any merger discussions.
And finally, there is the enterprise value that takes into consideration certain intangibles like your brand, goodwill, strategic competitive advantages, proprietary products or technologies, and other critical differentiators.
Recognize that there is the potential for a valuation gap to exist. What you think your business is worth needs to be realistic and defensible. And the same is true for any potential merger candidates and their expectations about the perceived value of their business.
Also see: "How to turn around a decline in revenue."
Of course, your transaction might be a merger rather than a sale, in which case, are both businesses valued equally prior to the intended transaction? Obviously, each business will have its own strengths and weaknesses and business metrics that will affect valuation, but will the two entities come together as relative equals?
Next month, part two will go into detail on merger tactics, including valuation tools, how both companies’ staffs can be affected in the process, the deal structure, expected timetables and how the business model might change after the merger takes place.
Kwicien is managing partner at Baltimore-based consulting and advisory services firm Daymark Advisors. Reach him at firstname.lastname@example.org.
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