When publicly owned companies such as Clariant, General Electric, Akzo Nobel and PolyOne buy or sell a major business unit, competitors can usually determine from public records the price and how it was paid. The Securities and Exchange Commission dic- tates that publicly owned companies disclose certain financial details of larger acquisitions and business sales.
But what about the middle market - $10 million to $100 million - transaction that is between two private parties without the legal requirement to disclose the purchase price? In today's market where buyers are increasingly private equity groups with no legal requirement to disclose pricing, such information is often hard to come by and benchmarking your company's value is more difficult than ever.
Today we are in possibly the strongest acquisition market in our history. The perception among industry participants is that the market is now a seller's market, and that prices paid have never been higher. In our firm's recent mergers and acquisitions experience, we can advise that this is indeed the case; however, there are major considerations that either can enhance or diminish your company's value in the eyes of a buyer.
The question then becomes, if you are a middle-market buyer or seller in the plastics industry, how do you benchmark acquisition values?
These are a few of the major factors affecting the value of any plastics company:
Does it have a pattern of consistent growth in sales and profits and a coherent business plan with which to sustain business growth? (Buyers ``buy'' growth in earnings.)
Does it have a proprietary line of business and/or some technological/manufacturing and/or sales/marketing advantages?
Are its customers and markets healthy and growing or are they in decline?
Is the management team strong and capable of managing a much larger business?
Is the company in a market niche that is coveted by others, e.g., medical, aerospace applications?
Is it located in a region into which others are seeking to expand?
Have its financial statements been audited, and are they without irregularities? (Poor financial reporting harms your credibility with buyers.)
Is it vulnerable to a loss of business to Mexico and China?
As a rule, companies with little or no growth, no business plan, poorly maintained financial statements, poor earnings and ailing customers or end markets sell at lower multiples of earnings than those without these problems.
As a rule, larger companies also sell for higher earnings multiples, since buyers usually associate a larger business with a lower investment risk. But always remember to look at the value factors as they relate to your own company, as these factors could affect the value of your company by several multiples of earnings.
In our firm's view, the owner(s) of a privately owned company, or a public company considering the sale of divisions/subsidiaries, should:
* Sell before the end of 2007 while the M&A market is still strong.
* Benchmark the company's value using our guidelines. However, we strongly recommend the use of a financial services firm to assist you.
* Plan to use a competitive bid process to maximize your purchase price.
* Avoid whenever possible entering into that friendly one-on-one conversation with a buyer. It could cost you 10-20 percent or more of your potential purchase price.
* Consider that today's lucrative long-term top-end capital gains rates of 15 percent upon the sale of your company may increase substantially following the national elections under a new administration.
Bill Ridenour is president of Polymer Transaction Advisors Inc., an M&A and strategic planning consulting firm for the plastics industry in Newbury, Ohio.