Last week I mentioned that I do all my valuations myself. I want to use this piece to share my experience in valuation which I gathered over the years.
One notable major business valuation I did was the acquisition of a Pension Fund Administrator (PFA) during the recapitalisation in 2011. We had used multiple methods to arrive at our consideration and we got to the point of who should pay the annual fees for the existing directors. The deal was being discussed within Q1 and the sellers insisted that the directors must be paid their one year fees in full (and not to be prorated till the point of acquisition) and that cost should be added to the purchase consideration. It was a deal breaker!
In 2017, when I was to set up Rigo MfB, I contacted a broker to help scout for licenses on sale. I got about four different licenses for review but the one that caught my attention was being held by my former bosses and run by an acquaintance. The balance sheet did not particularly look strong so I was willing to pay a fair price as there was no verifiable physical evidence for the figures in the balance sheet. I made my offer but the seller insisted that they had set a price even though it was not commensurate with reality. Their insistence broke the deal.
In 2018, I was opportune to be invited to midwife an acquisition deal with a $3m offer. The buyer was going to make payment when he decided to consult me. Preliminary valuations based on the books revealed that the company was worth far less than $1m. I thought I had a made a mistake. I tried all known methods but the result remained the same. I requested for due diligence (remember we have discussed this). The sellers denied me access to the manufacturing plant that would have enabled me observe production process. I suspected that they had contracted their production and there were no machines especially when the balance sheet showed that the machines were fully depreciated (i.e. that the machines have lived their useful lives) and to help the balance sheet, the company had carried out a revaluation of asset. I observed also during due diligence that the source of their raw material was obscured, the factory was a leasehold with very short unexpired life (the implication is that you could be kicked out when the present lease expires), the brand was not part of the deal (which means the seller will walk away with the brand which is supposed to be the interest of my Principal). All these led to my request for a meeting. During the meeting, the parties did not enjoy the fact that I asked certain direct questions. They then did not only become aggressive but continued to pressure my Principal for immediate payment of the purchase consideration. I gave my opinion. My opinion was that I will not touch the company with a 12ft pole but if my Principal was that desperate, he should not pay more than $1m and should expect to see nothing on takeover.
I have deliberately highlighted these three scenarios from different industries with broken deals to enable me espouse matters you could watch out for when carrying out a valuation. It contained matters that can break a deal and the soft factors you need to watch out for. Hopefully I should be able to provide scenarios where everything went well in another piece.
In conclusion, for you to pay a fair price for any business including a MfB, you must ensure that you do a thorough review of the books. The attitude and professionalism of the sellers and brokers are also very important. Just like I said last week, if you do not have the expertise, use a professional. You will be glad you did.
See you next week.
Frontpage December 11, 2019