Brad Kerkhof & Arjaan De Visser
by Brad Kerkhof & Arjaan De Visser
Risk in the current environment
Risk, real and perceived, is a critical factor in M&A. Risk informs valuation and drives deal structure.
The market today is full of risk. Factors such as the Covid-19 pandemic, increasing interest rates, inflation, and global supply chain issues have created an unpredictable economic environment. Risk, left unattended, can expand from reality into fantasy and can quickly erode confidence. Determining what is real and what is not is critical to completing a successful transaction.
Data is the remedy
The best approach to minimising risk is to connect the story of the business with robust data. We have found that sharing data early in the process:
Acquirers approach investments with healthy scepticism based on known and unknown risks. It is impossible to remove all risk, but one must identify, quantify, and minimise known risks.
Good data can illuminate past and current performance, set the groundwork for forecasts, and decrease investment uncertainty.
Example: The logistics industry
With the marked increase in freight rates across North America in the last year, many logistics businesses realised increased revenue and earnings. The risk to acquirers is that these elevated earnings may not be sustainable. To address this pricing risk, parties can quantify the impact of increased freight rates by analysing detailed shipping data.
The first step is to analyse the data and discern trends in key performance indicators such as revenue per shipment, profit per mile, revenue from new customers, and shipments per month which will provide clarity on what has driven the changes in earnings.
Then, supplement the data with a review of macro-economic and historical trends to:
Completing this data-driven exercise uncovers the complete story of business and earnings performance in the past, present, and future. Minimising the investment risk comes from understanding earnings and business trends independent of the known risk of fluctuating freight rates.
Conclusion
In today’s market, acquirers are rightfully cautious. Negotiations commence at the very beginning of a sales process, and to get the right valuation with an appropriate structure buyers and sellers must take extra steps to build confidence, reduce uncertainty, and provide support for sustainable earnings. Our suggestion – use data as your guide.
Brad Kerkhof has 5 years of M&A experience and has been involved in 20+ transactions. He has experience in clean energy, logistics technology, and industrial products. Brad is expected to complete his MBA in 2022, specializing in strategic valuations. Contact Brad.
Arjaan De Visser is an associate with Stillwater Capital with experience in logistics, light manufacturing, distribution, and business services. Arjaan is a Chartered Professional Accountant and is a student with the Canadian Institute of Chartered Business Valuators. Contact Arjaan.
Stillwater Capital is a mid-market Mergers and Acquisitions firm established over 20 years ago. Stillwater is a firm known for its integrity, world-class advice, and proven track record of over 100 completed transactions and a 95% closing rate on sell-side transactions.
GCG member firmStillwater Capital CorporationOakville, Toronto (ON), CanadaT: +1 905 845 4340
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