Given the volatility in today's Market, Emily Martin, president of Aschinger Electric - A Guarantee Electrical Company, says both buyers and sellers are facing economic pressures that are impacting their deal calculations.
"In order to capture more market share, we need more people to do that," Martin said during the St. Louis Smart Business Dealmakers Conference. "It's really looking at, are there strategic acquisitions that would add markets that are different, either geography or in the type of work that they perform, and the strength of the employee base, because it's difficult to do organic growth when it is so hard to get additional people on staff?"
Additionally, analyzing potential deals has changed, largely because of the ripple effects from the pandemic. She says a target's financials need to be normalized as some of the pandemic-era numbers may appear on the surface as positive, such as PPP or ERC or even inflation, which has increased revenue in some businesses without actually increasing revenue.
"Normalizing those things out and also looking at those past few years of growth and that growth plan to really see is that achievable?" she says. "Or is some of that based upon these factors that have existed?"
Another issue she's seeing, particularly in the construction industry because of labor and supply chain constraints is a lot of shifting of revenue. That leads to the question, are those revenue projections achievable? Or are there other outside factors that are going to impact the ability to hit those? For a buyer, she says that means looking a lot deeper into that operationally than they might otherwise.
From her experience on the sell-side and in post-acquisition integration, she says it's important to look deeply at the target's leadership team that's below the leader.
"Are there the people in place to be able to execute the plan?" she says. "Are those people staying with the business? And what would be the go-forward if those key personnel are not there."
And as buyers, she says these are issues she expects sellers to proactively address these issues.
"Having conversations with some closely held business owners who were unable to understand that this big growth is not due to anything that you had done," Martin says. "I'm not going to base EBITDA calculations on income into the business that isn't part of the operating business. So, I think there can be some inability to segregate those things and to understand how they impact value."
Transparency, she says, is important to help a buyer see what the numbers should be given all the potential impacts of economic factors that affect revenue or margin.
"How good are those projections?" she says. "I'd rather everybody have a very clear view on that and test those things pretty significantly because in this environment, I don't think you can rely upon past results to give you good data."
To be ready for a transaction in this market, Martin says, from an operational standpoint, companies should concern themselves with the general blocking and tackling — good processes, good procedures, no single points of failure in leadership or management teams.
"I think those, from an operational standpoint, would be the biggest general operating advice I would give."
