Successful mergers and acquisitions require an entrepreneurial mindset focused on growth, branding, and value creation.
There is a tremendous interest in mergers and acquisitions in our industry. More and more private equity is flowing into our industry every day, and the professional service providers that support these transactions are gaining more experience in all of the mechanics of how to do and finance these deals.
That said, if one thing is lacking in so many of those advisors, it is a true understanding of entrepreneurship. The whole idea behind entrepreneurship is about creating value that can be extracted on exit. What creates value? A high revenue growth rate is number one. And having a brand that makes the phone ring and emails come in without outbound sales is another. That brand in turn supports higher prices and makes the firm better able to weather the comings and goings of people versus individuals you hire bringing or taking your business with them. Recurring revenue streams are yet another big value driver. More of that is better than all individual project-driven revenue.
Valuations using multiples of historic EBIT are fine for steady state companies that are flat or barely growing. But for growth companies with a real brand, the EBIT that matters is projected future EBIT based on two things. One, revenue growth rate. And two, what kinds of overhead savings can be realized in the selling company if they become part of the buying company. That will give you an entirely different set of numbers.
Buyers who do enough of these deals with high growth companies that have a real brand soon figure out that they then take on all of the characteristics of the companies that are under their umbrella. Then the whole thing has incredible value because the acquirer has proved they can buy and integrate other companies successfully and are therefore what is called a “platform” company by the private equity crowd. Platform companies are the most valuable ones. And by the way, don’t get too hung up on internal growth versus acquired growth. Who said internal growth is more highly valued? I don’t think you will find the evidence to support this commonly-held misconception.
I don’t believe most people in our business really understand the valuations that are possible today IF you have a growth engine/platform company. Just this week I spoke with an old client of mine whom I have known for 35 years and is receiving a sizable PE investment based on a $1 billion plus valuation of his company. That is billion with a “B.” These kinds of numbers were unheard of 10 years ago. I honestly laugh when people say you can’t make money in our professions/industry. I always think to myself, “YOU can’t make money, but that doesn’t mean someone else can’t!”
The opportunity is tremendous. But make sure if you get into this stuff you find the right advisors who not only know the technical aspects of how to do these deals, but who also understand the big picture aspects of entrepreneurship and what is going to create the most value for you in the future. Learn about Zweig Group’s Transition consulting services here.
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.
