Transaction advisory - page 2

Business activity is continuously connected with foreseeing the future. It is exactly the future, and not the present conditions that decides about success of any enterprise. Whether the enterprise will turn out to be profitable and succeed on the market will result from its ability to foresee prevailing conditions on a widely understood market in the following years. What growth rate will be like, whether the branch of our interest will have to face aggressive competition, how consumer tastes and attitudes will change, in what legal environment we will have to function? Such questions can be multiplied endlessly. What therefore can we do to improve the quality of formulated economic forecasts, and, at the same time, to increase chances of achieving goals established before we start a business venture?

Since I started providing transaction services, in other words advising Clients in purchase and sales transactions as well as enterprise mergers and acquisitions, one question has been constantly on my mind: what is truly an advisor’s role in a transaction? What is my role and what is the role of the other party’s advisor? The answer is pretty clear if a Client commissions RSM to sell their company or to buy one – in such situation, our role is limited to negotiating best price and securing the Client’s interests in agreements. All the actions taken are to satisfy the highest imperative goal „I want to sell” or „ I want to buy”. However, sometimes the imperative “I want to sell/buy” is not as strong as the mentioned “want”. We often hear our Clients saying “I could” and not “I must”, “I would like” and not “I want to”.

It is evident that in the free-market economy, especially in branches with low entry barriers such as consulting, a customer has a special position. It is our client who, as a buyer of goods and services, determines the success, or failure, of  business we – professional advisors and consultants, run.

Company valuation is a topic most managers and owners are likely to face at some point in running their large-sized businesses. The study is usually elaborated in connection with a prospective company acquisition/sale transaction, allotment of an organised part of the company into the structures of a new entity, or in relation to conditions imposed by regulations on financial review. These are, of course, only some examples – the list of circumstances that require or simply contribute to preparing a professional company valuation is much longer.

Let's say I purchased a company and... ... not everything is quite as I had assumed, although nobody was trying to cheat me. Does that sound familiar? I fear it does. In my job I work with people who are in charge of deciding whether to acquire another company, and if so – for what price. In the course of negotiation the price is usually established as a multiple of EBIT/EBITDA/net profit. I am personally not a supporter of this method. In my opinion it is much better to evaluate a company using the DCF methods in three scenarios: positive, neutral and negative. But who has time for such things these days? Due to its simplicity the multiple method is gaining many supporters among decision-makers.