This month’s issue of the monthly executive brief providing M&A market insight for C-level management and their professional advisors.
A number of companies report middle market M&A data, including Thomson Reuters, Bloomberg and G.F. Data. For the past two quarters, G.F. Data has been tracking two new statistics: the nature of the selling entity, and the effect of continuing management on deal valuations. The early data suggests that there may be “extra gold at the end of the rainbow” for those business owners willing to make a longer transition part of their overall business exit plan.
Future earnings depend on how well the company continues to perform. When a business owner chooses to sell, transaction terms can include the seller receiving payment relative to the ongoing success of the company. One way to ensure the continued success is for key management (which may or may not include the owner) to continue working at the company after the business is sold. This helps to smooth the succession; reduce interruption and impact on employees, customers, venders and suppliers; and reassures key players who now see a blend of old and new for the critical transition period.
Of interesting note, the chart indicates that continuing management and financial performance can both influence the valuation of a business. Companies with above-average financial results yet without continuing management demonstrated a 0.5 time lower valuation compared to peers. Further, valuations were 1.2 times lower than peers for businesses with neither continuing management nor above-average financial performance. This data suggests that a “management premium” is in place, and buyers are willing pay top-dollar for management to continue after the deal is closed.
Not only does the company have a higher likelihood of continued success, but also the selling price of the company can itself be higher if the owner and/or management continue working at the company after the business is sold.
When you begin to ponder stepping into your golden years, factoring in a longer transit stage may well be to your advantage.
For more information contact:
Douglas Nix, CA | Vice Chairman CFA
905 845 4340 ext. 211