Negotiating Your SMB’s Valuation During an M&A Deal

Valuation negotiation will be the most tricky part of M&A transactions for SMBs. If you are looking for opportunities to get the best negotiation in times of M&A, valuing your SMB will be the best option to depend on.

A business valuation in M&A deals sets the base for all discussions. Negotiating during an M&A deal is more than just getting the highest price possible; it is about getting fair deals that benefit everyone involved in the business’s success.

By Mastering the art of negotiation you increase the chances of securing a favorable deal that maximizes the return on your investment while protecting your interests and smooth transition for stakeholders involved.

Valuation negotiation and M&A deal

Valuation negotiation is the main focus of getting a good M&A deal. What should be the first step if your SMB is looking for an M&A. Though valuation negotiation is a complex process, getting it done is important for your business to proceed further. Now, let’s see its role.

The role of valuation negotiation in M&A transactions

Valuation negotiation is the basis on which the buyer and seller can agree upon a favorable deal in an M&A transaction. To begin with a valuation negotiation, do a proper SMB valuation by considering factors like:

• Financial performance
• Growth potential
• Market position
• Industry trends and more

The buyer and the seller will look into these aspects to finalize a fair value during an M&A transaction.

Key factors that influence SMB valuation during M&A deals

It’s essential to consider the following aspects to guarantee a successful transaction in SMB valuation during M&A deals.

• Financial Performance & Growth Potential – When deciding on an SMB valuation, it is necessary to consider the company’s performance and its growth potential. Various considerations include, liabilities, Cash flow, Profit margin and Revenue growth Analyzing these factors will reveal your business’s true potential, which can be useful in negotiations during M&A deals. If your company shows good signs of developing and becoming profitable, more parties will be interested in collaborating, making you win big deals.
• Intangible Assets – Your business is more than just physical assets. The weightage of your Intangible assets includes patents, trademarks, copyrights, machinery and more. All these factors can contribute to increasing your SMB valuation. Also, to arrive at fair M&A deals, the intended parties will look for companies with rich intangible assets.
• Industry and Market Conditions – Industry health and prospects matter greatly when valuing your SMB for M&A deals. Companies in expanding industries with space to increase their market share are good acquisition targets. Similarly, the market size for a business’s products or services is another important factor impacting the value of SMBs. Your offer’s worth will rise according to the strength of the market and its growth potential.
• Risk Profile – Pay close attention to the risks involved while determining the value of an SMB. The term “risk” covers a wide range of concepts, including, Market share, brand Recognition, barriers to entry, Chances of regulatory changes and more.

Considering all these factors, a more accurate SMB valuation can help the buyer and seller make better judgments.

Importance of preparing for negotiation to achieve favorable terms

In M&A deals, getting the expected value requires preparation for the valuation negotiation. Make decisions based on data and keep your expectations in check at all times. The following are some of the most significant reasons to get ready for the valuation negotiation.

Through preparations, you will know every detail of your SMB’s financials. When you fix a value for your company, you should be able to justify it with clear data and be ready for any questions, which can be possible by preparing through valuation negotiation.

Preparation will help you know your SMB’s strengths in valuation negotiation. This could include:

• Your unique IP
• Customer relationships and
• Technology assets

Preparing for valuation negotiation will also involve double-checking all the legal and financial risks you might be ready to address during valuation negotiations.

How to negotiate SMB valuation during an M&A deal?

You should tick a few checkboxes to effectively negotiate SMB valuation during M&A deals.

Conducting Pre-Negotiation Due Diligence

One of the most important steps in ensuring successful M&A deals is conducting thorough due diligence before finalizing the agreement. This phase completely examines and analyzes your SMB, which could give you a better understanding of where you stand and your SMB’s actual value.

First, clearly outline your goals for the M&A deals. Are you looking for growth opportunities or exiting the business altogether? Understanding what you expect from M&A deals will help you do the research better.

Always have a checklist that will act as a guide, which considers all the aspects of your business, including: Financing. IT, Human Resources, Operations, Legal and Compliance.

Review your SMB’s financial statements, such as the cash flow statements, during the due diligence process to determine your actual performance. This can help you negotiate better and more clearly during M&A deals. Review all your legal documents, including:contracts, leases, licenses. ip rights and liabilities.

Importance of doing SWOT analysis as part of due diligence

You must do a SWOT analysis for proper due diligence for valuation negotiations SWOT analysis can help you identify your SMB’s internal strengths and weaknesses and external opportunities and threats in the market. This information will give you a better picture of your company.

SWOT analysis helps you find the potential threats to your SMB. Identifying the risks early through SWOT analysis can help you develop the strategies to overcome them for a better valuation negotiation.

Tips to conduct a thorough due diligence

Try incorporating the tips below to conduct complete due diligence:

• Stick to advanced technologies to gather and organize financial data accurately.
• Categorize the documents accordingly, such as financial, legal, operations, etc., to make finding the relevant document easier when needed.
• Standardize the naming format for documents to maintain consistency and for easy retrieval.
• Get support from valuation experts who will make the job easier with their knowledge and experience.
• Always review your documents for any adjustments and get clarification whenever needed.

Establishing Realistic Valuation Expectations for M&A deal

Ensure that you always have a realistic SMB valuation during M&A deal negotiations. The following factors can help you set a practical valuation negotiation. Do proper research on recent M&A transactions in your industry. This will give you an idea of the market’s trend and how a similarly-sized company is valued to set your bar in valuation negotiation.

The next step is to compare your performance against your competitors or similar businesses in the industry to assess the benchmark. This will help you know where your SMB stands in the industry and what factors might influence the valuation negotiation. Note your Unique Selling Point (USP) and any competitive advantage you can offer that could justify a higher SMB valuation.

Common valuation methodologies used in M&A transactions

There are several methods to do SMB valuation during M&A deals. The following common methodologies most companies use:

• Cost-based approach – Other names for the cost approach include the reproduction value approach and the replacement value approach. Here, total costs related to replicating the company determine its value.
• Market-based approach – The market approach to SMB valuation relies on comparing a firm to other businesses in the same industry to ascertain its precise worth. Remember, this approach works only when similar companies are in the industry to compare
• Asset-based approach – In SMB valuation, the asset approach is the most basic technique that depends on the company’s net asset value (NAV), assets minus liabilities. All the tangible and intangible assets are added and deducted from the liabilities, giving us the SMB’s value.
• DCF approach – Discounted Cash Flow (DCF) is the most popular approach to SMB valuation. This method calculates the company’s value by discounting the expected cash flow over the next five years. Discounting future cash flows using an appropriate discount rate determines the present value, which can help know the SMB’s value.

It is important to include both qualitative and quantitative factors to make your valuation negotiations more credible because quantitative factors such as financial statements ,revenue streams and assets

Building a Strong Negotiation Strategy

Creating a compelling negotiation plan is your next step in negotiating your SMB valuation during M&A transactions. prioritize learning the demands of your customers. Research on the buyer’s motive, financial capabilities and previous m&a deals.

During the due diligence stage, anticipate the buyer’s inquiries and concerns. This will enable you to identify any possible issues early on and take appropriate action to resolve them. Consider having consultants and valuation specialists help you with the negotiations. Their expertise can help you understand difficult ideas during valuation negotiations.

How to communicate your SMB’s value proposition and uniqueness

An important step in a better valuation negotiation is communicating it. Here are some ways to tell them your company is a good bet.

• Evaluate your SMB’s unique factors, such as competitive advantage and USP, and highlight them to show how your business is an attractive investment opportunity.
• Tell a story. Create an interesting story about your SMB’s journey, milestones, and achievements. This can help capture the potential buyer’s attention.
• Always have a backup for your data. Quantifying the numbers through metrics increases credibility, and potential buyers will know your Return On Investment (ROI).
• Tailor your communication plan, like adjusting your presentation format to match the potential buyer’s focus.

Leveraging Professional Advisors

During the valuation negotiation, getting support from professional advisors such as investment banks or M&A consultants is better to make your SMB valuation more accurate and secure the best M&A deals.

Advisors conduct a thorough market analysis by assessing Industry changes, Competition and Market trends. Doing this can help you understand your position among competitors and find the correct acquisition targets.

There are various SMB valuation methodologies, and most require adequate knowledge of industry trends and assumptions for which valuation experts could greatly help. Advisors play an important role in representing your SMB and advocating for favorable terms. They use negotiation skills to resolve conflicts and reach mutually beneficial M&A deals.

For all these and more, Eqvista will be your perfect choice. We offer company valuation services that can benefit every aspect of your SMB.

Tips to choose the right advisors to support your SMB’s negotiation efforts

• Look for an advisor with adequate experience and knowledge. At Eqvista, our professional team deeply understands all valuation concepts, making your job easy.
• Always check the advisor’s track record. At Eqvista, we have served over 15000 companies, providing all their business needs on time.
• Understand the fee structure, know the payment terms, and check whether the fees are transparent. At Eqvista, we understand the financial limitations of SMBs and provide exceptional services at an affordable cost.

How can Eqvista help your SMB with M&A deals?

Getting your company valued is important to start your operations and during M&A deals. Considering all the complex steps and processes, consider choosing a valuation expert for a more precise business valuation.

At Eqvista, we provide business valuation services, cap table management, equity distribution, and more. Conducting a business valuation can be difficult as it’s important to consider all the business nuances to arrive at an accurate valuation. This is where Eqvista could be of great help. To learn more, contact us Today!