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Finding the Right Target for Your Company

By Generational Equity

09/07/2021

Recently the M&A Source conducted a blind valuation experiment with three separate PE firms. They took a company that had actually sold in 2018 and removed some information for the transaction so that the PE firms wouldn’t be able to recognize the deal.

They ran this experiment for one reason: To see how the PE firms “valued” the target and to see if any would pay a premium for the deal and if so, why.

It was a fascinating experiment and the results show just how vital it is for you to research the buyers you will put on your marketing list in order to find the optimal deal with the best buyer for your business.

Here is how the three PE firms valued the mythical target:

PE Firm A = Valuation was 20% HIGHER than what the company sold for

PE Firm B = Valuation was equal to the selling price paid

PE Firm C = Valuation was 80% of the selling price

The M&A Source then met with each firm to determine why there was such a wide variance in the valuations.

It turned out that the primary difference was that PE Firm A already had experience in the target’s industry and was not concerned about the standard customer concentration found in the industry. The other two firms had no experience in that business, saw the concentration as a risk, and discounted their valuations because of this.

So a key lesson learned through this exercise is just how critical it is to approach the right buyers for your business – if you don’t you could run the risk of not receiving an optimal offer and getting a discounted buyout.

A second key lesson, and one that we so firmly believe in and try to accomplish with all of our clients, is the importance of creating a "limited auction" for your company with as many buyers as possible.

Most importantly, the final takeaway here is just how critical it is to have M&A professionals represent you when you are going to market. A team like Generational has access to M&A databases that we research thoroughly to create the optimal buyer list for our clients.

In addition, we have a proprietary software system named DealForce, which allows buyers to register with us, tell us exactly what businesses they are looking for, and then research our client database to find perfect matches. In fact, we have over 34K buyers registered with us overall.

Certainly, if you have the time, you can do your own research and probably locate a good buyer or two. However, Generational has sold over 1,000 companies (we reached our 1,000th transaction in April), has a proven track record and, importantly, has in-depth relationships with premium buyers of all types.

In fact, we have buyers return to us and make multiple acquisitions quite regularly because they enjoy working with professionals on our deal teams.

So when you approach the market with your business, be sure to find buyers that are optimal, that are experienced in your niche and, likewise, create a limited auction to get as much buyer interest as possible. If you would like to review the experiment the M&A Source ran, you can do so here:

And if you would like to learn more about limited auctions, valuation methods, and how to locate buyers, you would benefit greatly by attending one of our Growth and Exit planning conferences. To learn more about them, use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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