As it is a matter of professional techniques linked with financial mathematics, to establish a fair value of target companies is relatively simple.   But which is the emotional value, and to what extent determine a deal in an M&A process?

Por Eugenio Micheletti* para staffingamericalatina

Those who dedicate to M&A cannot leave aside and must try to understand the emotional facet in decisions of selling a company. Financial mathematics, finance, macro and micro economics, accountancy and other academic disciplines, as well as the knowledge of the markets and sectors where the company operates, give us the necessary tools to estimate a fair value. Specialization is essential: research of opportunities, analysis and evaluation, company valuation, negotiation, legal and accountant due diligence, contracts, operation and commercial aspects, etc. But the owner has to be emotional prepared to sell his company; and sometimes this is determining factor.

Aspects involved in the emotional content

The entrepreneur usually evaluates the company from an emotional point of view. He gave birth to it, saw it grow, invested money and energy, created a team that developed together with the company, and has gone a long way achieving the goals sought. These matters generate a relationship between people and the company that usually go beyond business.

When the company was incorporated by previous generations, such heritage could have been a “non-transferrable” good to third parties that may throw away the effortful achievements of predecessors.

“What are we going to leave for our children?” This is the question certain businessmen ask themselves, particularly when their heirs are not in proper conditions of becoming in charge of the company (due to age or experience).

There is uncertainty regarding the roles the current owners will play once the company is sold. “What am I going to do?” or “How will the relationship with major shareholders be?” depending on whether they sell 100% of the block of shares or over 51% of shares.

Developing alternatives

If we can find what the motivation of the sell is and the possible reasons for not selling, we may be able to offer adequate alternatives so that the agreement succeeds. To mention a few:

–          Show previous successful cases within the purchasing company (should there be any): so that potential sellers may contact businessmen who have already sold to the purchasing company.

–          Provide certainty regarding the rules among sellers and buyers: contracts must foresee formulas to determine shares’ prices, selling conditions, purchasing options and sales a posteriori, etc.

–          Settle attractive clear conditions regarding roles continuity: for the current employees as well as for the future generations who want to become part of the company. Defining levels of autonomy to operate the company.

–          Valuate the company using different methods and including every component that corresponds: premium control, bonuses for future growth perspectives, etc. Sellers must perceive the value as “fair”.

There is no price to compensate the emotional decision of not selling. Although negotiating the value of a company and contractual conditions are important issues, they depend on the fact that potential sellers have made the choice of letting go of the company and that their professional situation goes another way.

*Eugenio Micheletti is Director of Emerging Staffing Brokers

emicheletti@emergingsb.com