The present environment is favorable for owners of plastics businesses considering a sale. There is interest in and competition for firms that are performing well. This transactional activity is supported by a high level of cash and liquidity, which can further elevate pricing.
If you are seriously considering the sale of your company, you will want to know how you can obtain maximum value for your years of hard work.
You should begin by talking with an investment banking firm. Such a firm is responsible for managing and processing the transaction from beginning to end. The firm will prepare all marketing material, find buyer candidates and create a marketing campaign.
There are a variety of factors that can affect a deal's pricing and a buyer's interest. For instance, too much revenue from one customer, too much reliance on a sole material supplier or too much dependence on technology controlled by outsiders are all considerations.
An investment banker will explain to buyers the value drivers of the business, the attributes that can be sustained by continued operations following the sale. These drivers include the intangible assets that comprise your business, including distribution logistics, customer relationships and proprietary know-how. Another powerful intangible asset is the seller's workforce. Management talent that remains intact following a closing can be critical to securing a deal.
Of course, investment bankers also do number-crunching. Most often when addressing the value of a successful business, they conduct an earnings-based valuation that takes into account past and projected financial data, including analyses of revenues, cash flows, capital expenditures and working capital needs. Sometimes an earnings-based valuation is combined with an asset-based valuation, as when there is an underperforming business that owns some prized assets. Most successful companies in the plastics business are going to be valued on the basis of prospects, future profitability and cash flow. Investment bankers also consider the impact on financial performance of discretionary and above-market ownership perquisites, including travel and entertainment budgets. These and nonrecurring expenses are liable to skew the income statement. Accordingly, appropriate adjustments will have to be made to promote the real earning power and capacity of the business to a buyer.
Each business has a unique tale. Its story must be presented to the appropriate audience of bona fide buyer candidates in a credible way to highlight the value propositions inherent in the business.
Finally, we should not overlook buyers. Generally speaking, there are two kinds of buyers — financial and strategic. Investment bankers can help sellers understand which kind may be best-suited to their objectives. Financial buyers can be a fund or an investor from outside the plastics industry. Such a buyer is likely to look at the company differently than a strategic buyer will. A strategic buyer is looking to fold an acquisition into his operations while reducing costs and creating synergies. Depending on the fit, a strategic buyer may be persuaded to pay a premium for a synergistic business, a price greater than what might be paid by a financial buyer. But, for owners who wish to retain a portion of their business, there is a definite role for the financial buyer. This type of buyer is often more flexible on the structure and terms of a transaction, thus allowing a family to keep a stake going forward.
Irrespective of the buyer's nature, the conduct of a competitive deal process is critical. Therefore, the price the owner ultimately receives is not arrived at simply on the basis of a number-crunching exercise. Rather, the best deals, from the seller's financial point of view, are those that are the result of a market verdict developed through a dynamic, structured and thorough competitive marketing effort conducted by professionals.
Billow is managing director of Billow Butler & Co., a Chicago-based investment banking firm.