There is probably no more important source of potential disagreement between buyers and sellers than the projected performance of companies that are for sale.
Since future cash flows are a critical driver of value, projected cash flow is a key determinant of the price a buyer will be willing to pay to buy a business.
In deciding how to value a company, buyers in the middle market of the aerospace and defense industry usually consider and analyze a broad array of possible impacts to future cash flows including but not limited to: macro-economic conditions, program and platform production and utilization rates, segment-specific market dynamics, technological developments, competitors’ moves, regulatory actions, supply chain issues, cost structure shifts, and a host of other factors that could affect the profitability of the business. Some of these factors can be controlled or influenced by the shareholders of a business, others less so. But for all of these, sellers are best served to plan and prepare for buyers’ questions about these key projection assumptions.
Sellers should expect buyers to conduct exhaustive due diligence on their projection assumptions. And this is what creates the dilemma for sellers: sellers should cast their company in the best light possible, but without risking their credibility in buyer due diligence. Despite the thoroughness of due diligence, buyers recognize that the sellers have a clear information advantage and the buyers will need to trust the sellers to a certain degree. Accordingly, credibility is required to complete a deal successfully. If a buyer loses confidence in a seller’s credibility because the projections were found to be unrealistic in due diligence, then the seller is likely to find themselves with a failed sale process.
This then focuses us on the issue of just how aggressive a seller’s financial projections should be. We’ve observed that by offering optimistic but realistic projection assumptions supported with facts and data, a seller can effectively ‘thread the needle’ and get a high price for their business while at the same time assuring successful navigation of buyer due diligence. Threading this needle is challenging, but, after 21 years, we have gotten the hang of it. This is why one of the first things we do in our sell-side engagements is work with the client to analyze and optimize their projection assumptions.
Have a great day everyone!