Sell when you’re ready, but make sure you get the full value

Sub-Saharan Africa saw the lowest number of deals since 2009, in the first nine months of 2018, pushing inbound Mergers and Acquisitions (M&A) down 42 percent, according to the Investment Banking Sub-Saharan Africa (SSA) region review by Refinitiv, one of the world’s largest providers of financial markets data and infrastructure.

The report showed that Domestic and inter-SSA M&A totaled $2 billion, also down 64 percent year-on-year, as the lowest first nine months since 2002. Outbound M&A, however, went up 5 percent to $4.4 billion, with South Africa’s overseas acquisitions accounting for 81.9 percent of SSA outbound M&A activity. Acquisitions by companies headquartered in Mauritius and Zimbabwe accounted for 15.3 percent and 1.5 percent, respectively.

Franita Neuville, Head of Advisory and Investment Management for Market Development for Africa at Refinitiv said “the decrease could be due to a number of reasons including, but not limited to, loss of investment appetite from local and international investors, companies and countries becoming more inward looking, and political instability across SSA.”

However, as countries across the continent become more stable and major economies such as South Africa and Nigeria recover, we may see more inter-SSA M&A, and also more inbound M&A. For business owners who are considering selling stakes in their business or have been approached by a willing buyer, ensuring the company has the right and maximum value at the time of purchase is key.

In an ideal situation, business owners who are planning to sell prepare well in advance, focusing on valuation drivers — factors that can help increase cash flow to the business and reduce the risks associated with operating the company.

Although valuation drivers can be industry-specific, here are some general drivers that can help increase company valuation.

1. Roadmap

A roadmap is a strategic plan that defines your company’s goals and includes the major steps or milestones needed to reach those goals; you need one. This is because valuation exercises look to the future and expectations of how the company will perform. A company that has its future figured out naturally commands more value than one the buyer is taking a chance on and will have to totally rebuild.
If you have a strategic plan that you can pass on to a new owner that assures them that the business will continue and could even grow, you can negotiate a good sale.

2. Financial Performance

How do you discuss valuation without bringing up financials? Buyers will look at financial statements, trend analysis and margins. Your company needs to show growth in key areas such as revenue and Earnings before interest, tax, depreciation and amortization (EBITDA). Of course, buyers will also compare your company’s performance to competitors. So, even if you are growing at an impressive pace, if your competitors are doing much better, it affects your company’s valuation.
How good is your financial reporting? Is it in line with industry standards? If you have tidy financials, it’s a sign that you are keen to keep your company in order.

3. Customers

If your company has a well-diversified customer base, it’s a darling to buyers. You see, if a high percentage of your revenues are derived from a small concentration of customers, your company’s value may be take a hit. If you allow your business to become overdependent on a very small subsection of your customer base who are responsible for major revenues, it raises red flags for the potential buyer.
Always identify if you have any customer concentration risks and address them before you’re ready to sell.

4. Human Capital

Not every buyer will care who works for you, but an experienced buyer knows that you won’t buy a company and sack all the workers. You need to retain the best with knowledge, talents, skills, experience, and creativity to achieve the goals of the company. So, the quality of your workforce adds to the valuation of your company.
Buyers will hesitate to deploy capital if it only takes a few people leaving the company to cause serious trouble.

5. Technology

Technology changes at an ever-increasing pace, but you already know that. It is very important to invest in R&D to ensure at every point in time, you are catering to the needs of customers. That way your company stay relevant and commands a good value.

Don’t be surprised that buyers might want to know about your R&D practices and expenditures. They’d want to use that to determine whether your company has been able to change with the times and, whether you are abreast of new technological shifts.

While the valuation drivers listed above do not exhaust a prospective buyer’s list, they are key factors that you should pay attention to. With a little more research and understanding of your industry, you may even come up with more valuation drivers specific to your industry.

Above all, it is very important to let experts do their magic. You can’t do everything on your own and that’s why some companies are set up to ensure you derive maximum benefits from whatever business decision you make.

Eczellon Capital has closed several mergers and acquisitions deals. It’s an expertise developed over years of a passionate drive to see Africa attain its full potential. The company has been doing that by generating ideas for leaders and provide financing solutions that make the ideas become reality.

Let’s talk about Mergers and Acquisitions on +234.(0)1.295.4940