In determining their bid price, a buyer will model future cash flows using their best estimates of what the company is likely to generate in the years to come. Those estimates will be based only partially on the company’s own projections since most buyers are, not surprisingly, highly skeptical of figures that come from a potentially biased source. The real challenge for sellers is to provide unique information and data about the company that address weaknesses and risks in their projections and lead buyers to develop their own favorable models. For example:
- Is the management team in general committed to staying? Do the executives inspire confidence in their ability to produce the projected financial results? Any indication of dysfunction or reluctance to stay can be devastating to buyers’ projections who will factor in the cost and risk of rebuilding a leadership team.
- Similarly, does success depend largely on the skills of a single, talented individual who, for a variety of reasons, might not always be available in the future? There must be an attractive heir apparent or backup on the bench; otherwise, buyers will lower their projections to account for risk of losing that individual.
- Are company projections based on innovative technologies, new products, new customers, new markets or expected regulatory changes? If so, buyers will heavily discount future projections unless persuasive, supportive information is provided.
- Is there data available to provide analytical rationale for projected future revenue? Rather than management simply forecasting a generic percentage increase in revenue each year, can industry growth projections from respected industry experts be combined with historic penetration performance to show the logic used to develop the projections?
- Is the line of business highly dependent on external forces outside of the company’s control? In that case, buyers will need to be convinced those factors will not change in the future.
- And finally, are there credible opportunities to exceed the projections offered, such as long-term sales and marketing campaigns that are showing promise, process improvements that will soon be introduced, or new products ready to be launched? These may be too uncertain to build into the projections, but they can be cited as “potential upside” to offset concerns buyers may have with other aspects of future performance.
In several earlier editions of Deal Notes® we have stressed the importance of showing defendable projections when bringing a company to the market. But more is needed to achieve the highest price; the Confidential Information Memorandum and other data must convince buyers that the company will make its projections and more.
Have a great day everyone.
Managing Director, Aerospace