Finding a list of companies to acquire is exciting! You start thinking about all the possibilities and how the deal will grow your business exponentially. But before you move forward with any of these candidates, take a step back and make sure you are looking at companies in the right markets.

What are the “right markets?” Markets that have a healthy, stable demand and are growing. After all the primary driver for acquisitions is to help your company grow. Without researching markets first, you risk acquiring a company in a stagnant or declining market. Although the company may have strong financials today, if there’s no demand in the marketplace, your acquisition won’t deliver the expected returns on growth in the future. Without first selecting a market, you have reason to beware of even the most tempting buying opportunities.

Finding the right market begins by defining the market using geography, verticals or another relevant factor, and by developing market criteria to aid in your decision-making. Your research will begin with a broad sweep and become progressively narrower as you learn more about the market.  Your market criteria will help you objectively evaluate and compare the markets against your strategic rationale for acquisition.

Researching markets first not only helps you avoid acquiring a bad company, it helps you identify the best companies to buy. By conducting market research, you will gain a better understanding of the market, which will help you evaluate acquisition prospects and negotiate with owners as you proceed with the acquisition process.

Learn more about the “markets first” approach in our upcoming webinar How to Pick Top-Notch Markets.

After this webinar you will be able to:

  • Understand the market-driven process
  • Explain market criteria (market growth and size, competitive dynamics, barriers to entry) and how to use them to evaluate a market or segment
  • Describe effective secondary & primary market research techniques
  • Explain the triangulation technique to obtain the most relevant information for accurate decision-making
  • Develop tools to objectively compare and contrast markets

How to Pick Top-Notch Markets

Date: Thursday, February 23, 2017

Time: 1:00 PM – 2:00 PM EST

CPE credit is available,

Photo Credit: Paul Benson via Flickr cc

The Guideline Public Company (GPC) Method is one of the more popular valuation methodologies because people often hear about it in the news or in presentations. This method identifies prices for individual shares of publicly traded companies that are subject to the same industry dynamics as the subject company (the company you are trying to value).

The valuation multiples calculated from these companies provide an indication for how much a current investor in the marketplace would be willing to pay for similar situated company that we are trying to value. For comparison sake we might be looking at things like similar businesses, sizes, geographic regions, and other operating characteristics.

Is the GPC Method Appropriate for Middle Market Businesses?

Depending on the size of the subject company, using the GPC method can be hard to implement realistically. Many middle market companies are better suited for the completed transaction method or the Discounted Cash Flow (DCF) approach. However, for some industries such as cloud or information technology, GPC data can be very robust and indicative of what’s going on in the industry, even for smaller-sized companies.

Selecting Guideline Public Companies

There are a number of resources both paid and free that we use to identify guideline companies.

  1. Cap IQ – This is a paid resources that provides research and analysis on publicly traded companies and overall market awareness. You’ll be able to use the Cap IQ database and tools to identify a list of companies that are similar to the one you are trying to value.
  2. Securities and Exchange Commission – The SEC has a search tool called EDGAR that allows you to search by industry code and provides a list of all public companies that characterize themselves as being in that industry. This typically generates a lot of results which you’ll need to narrow down in order to make sure the public companies are really comparable to the subject company.
  3. Yahoo Finance / Google Finance – These online tools provide key data on publicly traded companies. Once you find a few good comps for your subject, you can look up their competitors on Yahoo or Google Finance and start developing your list of GPCs that way.

How Many Companies Do You Need?

For a good GPC you need at least five public companies in your comp set; we prefer to have at least 10. It provides for a lot more analysis for the range of industry multiples. I’ve seen as many as 30 companies used, but bigger is not necessarily better. When using the GPC method, you really have to ask, “Is the subject company really comparable to these public companies?” And if this causes you to whittle down your comp set to five or six companies, that’s fine.

Photo Credit: Jorge Franganillo via Flickr cc

The new year is off to a rocky start. The stock market’s performance so far in 2016 is fueling worries about the economy; globally stocks have slumped, oil prices continue to drop, and investors fear a new financial crisis. While it may be tempting to panic, a challenging market also presents a unique opportunity for strategic leaders.  In today’s environment, M&A can be a powerful tool to spur growth and tackle new obstacles.

The secret to successful growth is to adopt a demand-driven philosophy toward M&A, focusing on markets that have a high potential for future growth. Rather than generating a list of acquisition targets, some of which may be in declining markets, adopt a “markets-first” approach. Investigate which markets – geographic or vertical – will perform well for years to come. Begin your search broadly, then conduct research on specific market segments. This will help you develop a pipeline of relevant acquisition candidates.

Learn more about this markets-first, demand-driven approach to M&A in our Feb. 18 webinar:How to Pick Top-Notch Markets.”  CPE credit is available.

This webinar will equip you to:

  • Understand the market-driven process
  • Identify market criteria (such as market growth, competitive dynamics, barriers to entry, etc.) and use them to evaluate a market or segment
  • Describe effective secondary and primary market research techniques
  • Use the “triangulation technique” to obtain the most relevant information for accurate decision-making
  • Develop tools to objectively compare and contrast markets.

How to Pick Top-Notch Markets Webinar

    • Date: February 18
    • Time: 1:00 PM ET

About Capstone Webinars

Learn M&A Uabout strategic growth through M&A in Capstone’s monthly webinar series. In each live webinar, a seasoned M&A expert provides practical tools and tactics to accelerate your company’s growth. Continuing Professional Education credits are available. Attend all twelve Capstone Webinars and earn the M&A U™ Webinar Certificate to display your commitment to this important field in your business education. Click here to learn more.

Photo credit: Barn Images

What do you do when sales decline? If you’re Diageo, you move to Africa.

Diageo, the maker of Smirnoff vodka and Johnnie Walker whisky, has been a global liquor powerhouse for years. However, the company’s growth has been slowing in its traditional markets of North America, Asia-Pacific, Latin America and the Caribbean. In other words, organic growth (business as usual) is stagnant.

In this situation, Africa offers Diageo a huge potentially untapped market. It’s no secret that Africa is on the rise. According to IMF estimates, Sub-Saharan Africa and Nigeria are expected to grow between 4-5% in 2015 and 2016. No wonder that Diageo is pursuing an aggressive external growth strategy in the region.

The company recently made a $208 million bid to increase its stake in Guinness Nigeria, which houses Diageo’s beer brands. Diageo also terminated its partnership with Heineken in South Africa in July. Both of these moves would give Diageo more control over the business in its expansion in Africa.

Diageo is also pursuing growth in the spirits trade by building its own brands specifically for the African market. The company recognizes the need to “move down market;” rather than push expensive brands. In Africa, it is focused on selling to the masses, and sales have risen 6%.

Even though Africa presents a huge opportunity, there are challenges with expanding to a new market. Diageo is not alone in eyeing Africa – it faces competition from other companies like SABMiller which is pushing for higher beer consumption on that continent. And in some markets Diageo’s spirits business and beer business compete against each other.

When faced with stalled growth, meeting demand to a new market can be a life-saver for your business. Diageo has recognized the need to go where demand is on the rise.

However different your product, you may be in a similar position to Diageo – you see the writing on the wall and your once profitable markets are shrinking or stagnant. Don’t despair. Now is the time to look to future demand. Which markets are growing? Where are new customers to be found?

Once you’ve identified a market in which to expand, think about how you’ll get there? You can use M&A to expand rapidly and effectively in a new market and ensure your business continues to thrive.

Photo Credit – Nicholas Raymond via Flickr cc

Many people begin pursuing M&A by listing possible companies to buy. But there’s a far better approach when you’re planning an acquisition.

While a prospect company may look exciting today, a closer inspection can reveal it is operating in a a shrinking market. If you’ve invested all your resources pursuing one company only to find its future growth prospects are dim, you’ve unfortunately wasted lots of time and effort. You have to return to the beginning of the process and start all over again. This situation is all to common in my experience, which is why I recommend looking at markets before looking at companies.

The main benefit of a “markets-first” approach is that it allows you to identify and follow future demand. What your customers or potential customers will want in five or even ten years is key to any company’s success.

Learn more about the “markets-first” approach in our upcoming webinar,”How to Pick Top-Notch Markets,” on June 18.

View our full webinar calendar.

Are you looking for more ways to grow your business? Join our webinar with Mike Melo, President and CEO of ITA International, and learn how to use proactive, external growth to gain more business in any market.

This webinar highlights ITA’s journey in developing a successful acquisition strategy and growth program using the Roadmap to Acquisitions.

ITA, a global service company providing maritime and equipment primarily to the Department of Defense, encountered a harsh market environment during sequestration in 2013. Through the initiative, the company developed a proactive plan for growth. Employing careful research and our rigorous, proven process, Capstone and ITA identified over 100 acquisition prospects in a new, expanding market: Oil and gas. While the oil and gas market grows, so do ITA’s opportunities.

Hear this exciting story and learn about best practices and tools that you can apply to your own business.

Date: October 22
Time: 1:00 PM
Cost: FREE!
Register: https://www3.gotomeeting.com/register/980243222

How often do sellers have unrealistic expectations of their company’s value? What’s the best way for a buyer to approach them early in the process and address their concerns?

Todd Nelson, Capstone Valuation Advisor, answers:

This is a common issue where sellers hold high value expectations for their businesses. While price is not the only factor to consider when buying a business, it certainly plays a key role.

Keep in mind is that many sellers divesting a business for the first time may not understand their company value. For many, this business is their “baby,” so they may have very high expectations.

We counsel clients selling a business for the first time to go through a pricing analysis to gain a realistic understanding of the company’s value before they speak with potential acquirers.

For buyers, the way to address this issue directly with a seller is to clearly present your assumptions in your valuation model that has been developed with appropriate methodologies.

For example, the seller may believe their business is worth $20 million, but you only think it’s worth $11 million.

Walk through your valuation model with the seller. If you’re doing a DCF (discounted cash flow), show how you arrive at a value of $11 million when you discount the seller’s cash flow back at the proper rate and that is what you think the business is worth. Using the market approach, demonstrate that according to the market comps and multiples their company is worth about $11.4 million. These two methodologies should show that the business is worth around $11 million – not $20 million.

Of course, you may be willing to pay more for the company because of the strategic value or synergies you expect from the acquisition. And there are many factors other than price that may convince an owner to sell.

By presenting a sound analysis that involves reason, logic, and assumptions based on industry standards you can sometimes overcome a seller’s high expectations of their company’s value.