The due diligence phase is extremely intensive. During this phase investors will go in extreme detail investigating your business. Also, this is the moment where the purchase price will be defined. Make sure you understand how the purchase price is calculated and which factors can impact the price.
The final checks to do before starting the process
Once you decide to go to the market it is hard to stop the process. Make sure that all sell side documentation is ready, the virtual data room is populated, you prepared a Management Presentation and your team is ready.
Understand purchase price mechanics
The value of your business is defined as the enterprise value, which is often simplified with an Adjusted EBITDA multiplier. Most M&A deals are on a cash-free, debt-free basis and need to have a normal net working capital level at Closing. To arrive at the final net purchase price (or equity value) adjustments for cash, debt and net working capital need to be made.
Know how cash and debt balances impact price
To get to the equity value cash balances need to be added and debt deducted. The cash should be excess and freely available. All interest bearing debt falls under the definition of debt in a transaction. In addition, other non-operational items for which short-term money outflow is likely are considered debt-like.
Calculate and set your net working capital target
The working capital in your business needs to be at a “normal” level at Closing. If your level of working capital is not at the normal level at Closing this is adjusted in the purchase price. A normal level is often calculated by the average of the last twelve months.
Understand the relations between EBITDA, cash, debt and NWC adjustments and how they impact the price
EBITDA adjustments, debt-items, cash-items and net working capital items are all related to each other. If items in the income statement are adjusted and considered non-operational or non-recurring, the balance sheet position of these items need to be considered non-operational as well (i.e., not part of working capital but part of net debt). As EBITDA adjustments impact the purchase price against a multiple, be sure to set the right strategy what to consider non-operational.
Receive and evaluate the best offer for you
The offer with the highest price does not directly mean it is the best available offer. The purchase agreement can contain significant guarantees or indemnifications, which leave you even post-acquisition with high risks. The timing of the payment needs to be considered as well, is there a deferred consideration or earn out.