The M&A Reality
It seems that tepid economic growth has become our new normal in the U.S. and abroad (other than some emerging economies). The fact is most economists are predicting that 2013 will be similar to 2012 in terms of overall GDP growth, falling somewhere between 1-2% (that does not factor in the impact of sequestration, however). The fact that our economy is growing slower than hoped is having a big impact on companies worldwide.
For example, in a recent Reuter’s article, Accenture estimated that worldwide, firms need approximately $5 trillion in new revenues annually during the next several years to simply meet shareholders expectations of ROI (return on investment).
This is creating quite a dilemma in boardrooms around the globe. How can a company grow at a +8% clip when its resident economy is only expanding at 2%?
The answer is simple: If organic growth will not provide ample opportunity for expansion, acquisitions are the only real option.
This is how the article puts it:
“Half a decade on from the financial crisis, investors want to see earnings driven by more than just cost cutting. Their focus now is on a return to sales growth, which presents the world's largest corporations with a $5 trillion challenge. That is the amount of extra revenue the 1,200 top global companies need to find each year simply to meet analysts' expectations.”
Think about that estimate for a moment. The largest 1,200 companies in the world need to generate $5 trillion annually in order to satisfy the demands of shareholders and analysts. With GDP growth of 1-2% annually, that mark is going to be increasingly difficult to reach without using an acquisition strategy.
Although this may be bad news if you are the CEO of a large company, it is GREAT news if you own a privately held middle-market business. Your firm – depending on the industry you are in and how profitable you are – could be a prime target for one of these companies that is looking for acquisitions in order to expand revenue streams. And we already know that they are sitting on nearly a trillion in cash, so this could be a prime opportunity for middle-market business owners to find buyers.
Properly Position Your Business
Unfortunately, far too many privately held companies are not “buyer ready.” Their owners have not taken the necessary steps in advance to make sure that their companies are attractive to professional buyers. In fact, you may have a company that is doing well in the market and you would consider it to be a prime candidate to be acquired. However, if your financials are not in order, if the company is far too dependent on you, or if your company has a customer concentration issue (more than 10% of revenue from a single client), buyers may not be that keen to take a close look at your operation. These are just three of the deal-breaking issues we see with our clients.
Generational Equity is the leading middle-market M&A advisory firm in North America; our Thomson Reuters rankings prove this. We specialize in getting clients ready for buyer scrutiny. Our process begins with a complete and thorough evaluation of your company that includes the “recasting” of your financials. If you are not familiar with the term, recasting is the accepted accounting practice of removing unnecessary, discretionary, or non-recurring items from your financials to portray the true profitability of your company.
You, like most entrepreneurs, have worked closely with your accountant to legally understate your profitability for years. Your goal is to keep as much of your hard-earned money as possible. We recognize this but we also know that if your true profitability is not shown, chances are good buyers will pay you significantly less for your business than they would with post-recast numbers.
But recasting is just one part of our evaluation process. In addition, you will spend time with our analysts who will discuss your business and its historic trends, as well as develop a credible five-year forecast of revenue and profitability while working with you. From this forecast, using a variety of methods, we determine your current market value. This process helps our clients realize what they need to work on in order to enhance their buyer readiness.
If you would like to learn more about us, please follow the link to provide us with your contact information and we will reach out to you. We hold complimentary, no-obligation M&A seminars throughout North America. Chances are good that we will be in your region several times this year and would enjoy the opportunity to meet with you and discuss your options.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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