In the world of business valuation, we throw around a lot of terminology relating to value indications. You are probably most familiar with fair market value, but I would like to discuss a different value level. The International Glossary of Business Valuation Terms defines "investment value" as the value to a particular investor based on individual investment requirements and expectations. As a shareholder, this is the level of value at which you have the most opportunity to maximize your business investment.
Investment value involves synergies between firms and the additional value over and above fair market value. Synergies between A/E firms come in various forms including the ability to increase the revenues of the target firm, the reduction of risk when combined with an acquirer, savings through the elimination of duplicated efforts, and other qualitative factors including an increase in depth of management, enhanced financial performance, and diversification. Firm size will also likely drive investment value. Supply and demand can lead to additional price premiums when the number of buyers exceeds the number of good firms for sale.
How much difference can be realized from a sale at an investment value level when compared with fair market value? Following is aggregated transaction data for engineering and architecture firms at the median value to compare fair market value deals and investment value deals:
- On a multiple of sales – investment value transactions are approximately 20 percent higher.
- On a multiple of EBITDA or EBIT – investment value transactions are approximately 45 to 50 percent higher.
As a seller, investment value is certainly an appealing option to exit a firm. However, not every firm is a candidate. Investment value candidates will likely have a mix of the following characteristics:
- The firm operates in an attractive target market.
- The talent of the people on staff must be attractive to a buyer.
- Specialties and niche markets are generally sought after by investment buyers.
- Financial and organizational performance should be strong.
- Good financial and operational data must be available.
- Shareholders must be open-minded to the selling process.
- Sellers should have reasonable price expectations.
Should you decide that an investment buyer is a viable exit option, some preparatory work is necessary to effect a positive transaction experience. This entails assessing the value of your firm and ensuring that all shareholders are on the same page if governance documents require a vote for transaction approval. Thereafter, it is critical to understand that this process is time-consuming and it will require focus. Good staff to carry on with daily business details is a must. You should also ensure that the cultural fit feels right, as it is a major key to ensuring that your firm will continue to thrive after a deal is consummated. Lastly, be bold in getting to know the interested buyers by asking a lot of well-crafted questions that will provide you with insight into their company. You can be assured that a buyer is going to know a great deal about you!
Tracey D. Jeffers, MBA, CBA, CMEA, is a principal in ZweigWhite's Financial Advisory Services Group, where she oversees valuation services. Contact her at email@example.com or 479-582-5700.