Two decades ago, one of the technology industry niches I facilitated transactions in as a mergers & acquisitions professional with IBA, the oldest business brokerage firm in the Pacific Northwest, was the rapidly evolving Internet Service Provider (ISP) marketplace. That 1990’s dynamic M & A ISP marketplace was a classic bigger fish eating smaller fish environment with companies with four figures of customers being acquired by larger providers serving five figures of individuals & businesses in a race to capture market share and catch the attention of larger, often publicly traded companies. Today, the ISP market is dominated by providers owned by public traded companies like Comcast Xfinity, AT&T Internet, and Verizon FIOS and gone are the days when the email addresses of friends were followed by sos.com, ncia.com, or nwlink.com replaced by hotmail.com, gmail.com, and icloud.com.
The facilitation of business sales of privately held companies in a dynamic, evolving marketplace requires knowledge, experience, and a strong professional skill set for deal negotiation and facilitation. It also requires the ability to sell the future versus the past to buyers, their CFO’s and CPA’s, attorneys, investors, and lenders.
Business valuation in the mergers & acquisitions marketplace traditionally leans heavily on historical financial performance. This is a logical basis for assessment and appropriate for mature companies and industries. Business buyers, their accounting support professionals, banks, and investors often complete three to five year weighted average analysis of revenues & EBITDA as part of the valuation process. This analysis generates well supported business values that can be justified to investors and the banking community. However, this analysis, especially when an extended weighted average component is emphasized in reaching conclusions, often results in a conservative valuation that is not in the best interest of the seller side of the transaction, a side of the transaction exclusively represented by IBA.
Think about this valuation scenario as an owner (shareholder) of stock in the publicly traded company, Amazon.
The following were the values of a single share of Amazon stock over the past five years:
10/15/2014 $305.97
10/15/2015 $562.44
10/15/2016 $822.96
10/15/2017 $1002.94
Late September 2018 $2000+
If a buyer for one share of Amazon stock approached you today and offered to purchase it for its five-year weighted average value of $938.86 when the current market value is within 10% of $2000, would you accept? How about at the three-year weighted average of $1275.30? Any prudent investor would reject both of these offers as not reflective of the current market value of the asset. The same should be true for the owner of a privately held company selling their business, if a weighted average valuation of the company is proposed, when the business has shown a track record for increasing revenue and profit.
Continuing with the comparison to publicly traded stock, the two most common motivations for investing in the stock of publicly traded company are profits (dividends to ownership) and potential for appreciation. The same motivations apply to the acquisition of a privately held company. Historical financial performance is an important component in determining the “fair market” value of a privately held company, but in all honesty the acquiring entity cares more about what the company does tomorrow (2019) than yesterday (2018). The opportunity for appreciation in the value of a business through increasing revenue, market share, and profit is what motivates every business buyer in the marketplace. Recognition of this reality results in the need for a business broker to sell the future while leaning on the past for support. This is not a sales environment for a merger & acquisition professional lacking experience & knowledge related to deal facilitation in an evolving marketplace. Relevant industry knowledge is also an important component for achieving premium sale values and timely sales employing best practices throughout the sale process.
Jake Browning is a wonderful college quarterback for the Washington Huskies. Ask yourself if you were Paul Allen, owner of the Seahawks, if you would rather have Jake Browning or Russell Wilson, who has already played in the spotlight in two Superbowls, at quarterback for the team if it returned to the Superbowl in 2019. A mergers & acquisitions professional is the quarterback of a business sale team. I encourage all entrepreneurs wishing to sell their privately held company or family business to vet knowledge, experience, and professional skill set before selecting the quarterback for their team, especially in an emerging marketplace where some of the traditional rules for deal negotiation/facilitation do not necessarily apply.
The marketplace for ISP’s is yesterday’s news in the mergers & acquisitions world. I cannot remember the last time IBA facilitated a merger in that industry. New industries have followed ISP’s as the “hot” big fish eating small fish M & A marketplaces, one of those markets was when publicly traded companies entered the world of veterinary medicine and started acquiring hospitals. One of the buyers in numerous deals facilitated by IBA’s professional practice division in the veterinary hospital marketplace was VCA. In 2017, VCA was purchased by Mars, Inc. (www.bloomberg.com/news/articles/2017-01-09/mars-expands-in-pet-care-with-9-1-billion-deal-for-vca) proving once again that there is generally a bigger fish evaluating almost every company in every industry as a potential acquisition.
Today, one of the evolving marketplaces IBA is active in as a mergers & acquisitions firm is the cannabis industry. We have professionally facilitated the sale of growers, producer/processors, and retail businesses in the industry. Mergers & acquisitions continue in the industry. Some of the players of today will grow larger & stronger. Some of the players will be acquired and many early entrepreneurs in the industry will ultimately close their doors going the way of the airlines formerly serving the Pacific Northwest like Western Airlines, American West, and Pan Am World Airways.
Constellation Brands, the owner of Corona beer, is investing in cannabis (http://fortune.com/2017/10/30/constellation-brands-cannabis-canopy-growth/). The cannabis industry is in evolution. Bigger fish are eating smaller fish. We have brokers on our team that have witnessed the evolution in the industry in Colorado as merger & acquisition professionals, a marketplace several years ahead of Washington & Oregon.
If you are an entrepreneur in an evolving marketplace considering the sale of your business, we would welcome the opportunity to provide an overview of the knowledge, experience, and professional negotiation & deal facilitation services we provide our sell side clients. As a 24-year merger & acquisition professional and the owner of a 43-year-old business brokerage firm, I can say there are few business brokers in the Pacific Northwest or the United States that have more knowledge & experience professionally representing first & second generation entrepreneurs in new industries through the business sale process than IBA.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.