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The price is right

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In any M&A transaction there is an exchange of value, commonly known as ‘the price’. The seller is after a stellar premium and the buyer wishes to get a bargain. How does this work? The answer is: the seller and buyer can have common ground as they often look at the business differently.

The seller’s perspective…
When exploring a sale, the seller has to know the value of what they might be giving up. This is the value of the opportunity to keep the business operating with the current business plan and structure – this ‘keep scenario’ value is important as it should represent the bare minimum the seller should ordinarily accept. However, it is more important to understand its composition, its drivers, its risks, its sensitivities and limits, and its likely timing. This intelligence can drive the ability to decide what you can afford to give and what you need to keep in a negotiation.

The buyer’s perspective…
The buyer has the opportunity to improve, integrate, disintegrate, or expand the business – the ‘purchaser scenario’. The value to the buyers depends on their plans for the business, sources of funds, their own constraints and competing opportunities, and their risk appetite. All of this drives a total perception of value to the buyer that might have a very different composition to the value as determined by the seller.

Price …
Although the seller and the buyer can often have completely different perspectives, they each have a common language – price. They do not have to agree each other’s perspective on value – they only have to agree on price.

Price, or consideration, can also introduce new complexities as it can be comprised of cash, scrip, assets, contingent payments, options and other assets and services – we have even seen landscaping services offered as consideration! Importantly, the value of the consideration to the seller will depend on the attractiveness of its structure, the achievability of contingent consideration and the potential tax consequences of each component.

Getting the best price…
Let’s consider a relatively simple example. A seller determines his manufacturing and distribution business is worth $50m under the ‘keep scenario’ and considers two capable and interested buyers:

Buyer A Buyer B
Plans for business

Offshore the manufacturing.

Sell through buyer’s distribution channels.

Finance with cash and debt.

Plans for business

Cut costs.

Improve productivity, improved processes.

Finance with equity.

Purchaser scenario value

$85m

Purchaser scenario value

$60m

Offered consideration

$55m

Offered consideration

$60m

Structure of consideration

$25m cash upfront.

$25m of equity in Buyer A.

$5m in 1 year on delivery of a target profit.

Structure of consideration

$60m cash.

Continued role with attractive remuneration.

Although Buyer B has offered more than Buyer A, if the Seller has determined the value drivers of the bidders, he will know Buyer A has more ‘gas in their tank’ and Buyer B has submitted a fairly full price. This highlights that it is important to examine the buyer’s ability to pay rather than focus on their offered price.

Most importantly, the value of the consideration to the seller will depend on its structure, its achievability, and its potential tax consequences. In this example the equity in Buyer A needs to be valued, and there might be scrip-for-scrip rollover relief associated with this. Contingent forms of consideration such as Buyer A’s $5m triggered payment require assessment of its probability.

Do the work…
Overall, price negotiation and assessment can benefit from some rigorous assessment and it is not usually as simple as picking the highest number. Ideally, the following perspectives that drive price agreement are well analysed:

• the value (and its drivers) of the business to the seller

• the value (and its drivers) of the business to the buyer

• the value of the offered consideration to the seller

• the value of the offered consideration to the buyer

These factors should be considered to extract the most attractive quantum and form of consideration from each potential buyer and to determine the motivation of sellers.

Scott Pendlebury is a Melbourne Director of Hindal, an independent corporate advisory firm providing investment banking services to the mid-market. www.hindal.com.au

The information contained in this article is not legal advice. If you do have a legal enquiry you should talk to a Solicitor or Trade Mark Attorney before making a decision about what to do.

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