Indeed, there is an important margin of negotiation when determining the purchase valued of companies.  Beyond fair value, there are qualitative intrinsic factors that make companies more or less attractive. We shall review here those factors we consider to be most relevant.

By Eugenio Micheletti* for staffingamericalatina

Most assets (leaving aside those that have other parameters than financial ones, as artworks) have methods of value estimation, technically demonstrable.  Through those methods we get to a reasonable value, technical, fair.  However, certainly there are aspects that make one company more attractive than others, and this could lead investors to offer a higher amount than the technical value.

Qualitative aspects to take into account:

–          Leadership:

The leader has had a crucial role in strategy definition, plans execution and company image.  On the basis of leader knowledge we can infer the loyalty level of clients and employees, as well as the business sustainability in the long term.   To have a good leader increases potential investors’ interest.

–          Senior Management:

Developing a professional team that works in Senior Management allows us to project good performance to the future. Their know-how and exploitation to achieve goals, together with talents’ development are undoubtedly attractive elements for investors.

–          Corporate Governance:

The fact that a Company Board allocates resources and gives political support to the definition of principles, policies, procedures, ethic codes, compliance controls, and risk management in order to avoid or limit contingencies’ impact, shows there is a correct business management.   The potential investor could expect that negative events will not affect business in the short and mid-term.

–          Innovation, modernisation, technology, systems:

If the target Company has adequate systems (ERP, CRM, Data-warehouse), leading edge technology, and uses innovative tools, these means less investments during the years to come in these areas, causing a positive effect on cash flow.

–          Maturity in processes execution:

Efficient and mature processes are related with lower costs and higher incomes.  If the Company has high maturity levels in its processes, it means that it has achieved superior quality standards.

–          Internal control, accounting, reporting:

Financial information is one of the most important bases of value measurement of a Company; accounting entries in many companies are done considering tax standards of each country (but not according to the international standards as IFRS).   Furthermore, an adequate internal control system guarantees that every transaction has a reasonable impact on the accounting.

–          Contingencies:

Related to the corporate governance, to the internal control system and to the maturity of processes execution, contingencies could deter potential investors when likelihood of occurrence is high.

–          Continuity in the Company of the current leaders:

Even though we have explained the importance of leadership in the Company’s value, we also need to clarify if the leadership will be maintained during the next few years and how succession will be managed.  In other words, is not enough to value the achievements in the past, we also have to adequately plan the transition to the new leadership in the future. In these cases we could attentively observe the next generation (in family companies), talents in the Senior Management, or the alternative of an external manager that could join the company.

–          Taking control over the target company:

If the percentage of shares to be purchased is higher than 50%, in order to take the control over the company for strategic decisions (like selecting Directors, hiring or dismissing key employees, processes’ reengineering, among others), it involves the possibility of a control premium for the sellers.

Those aspects could lead sellers to ask for a higher value for their companies, and investors to be open to accept it.  A correct research of the available information and the measurement of the impact in the cash flow of the target company is mandatory, with a sensitivity analysis assessing different scenarios.

*Eugenio Micheletti is Director of Emerging Staffing Brokers

emicheletti@emergingsb.com