Commercial Lending Report: Beware of M+A Rules of Thumb
January 17, 2014
Lenders often finance mergers and acquisitions, and sometimes after the buyer and seller have agreed on the selling price and terms. Always inquire about the due diligence that a buyer has performed prior to your involvement. Too often, the parties are eager to close, so they sidestep the formal valuation process. Instead, they may rely on industry rules of thumb to negotiate price.
No matter how well known an industry rule of thumb is in regard to selling price — such as one times annual revenues or five times earnings — it should never be the sole method of valuation. Rules of thumb can be off point, to the extent that they are:
Discrepancies require explanations
In spite of their shortcomings, rules of thumb can be an important sanity check for formal appraisals. Suppose you read in a trade journal that companies in a particular industry sell for about three times EBITDA, and a borrower in that industry offers to pay six times EBITDA to purchase a competitor. Would you be willing to finance the deal? When discrepancies happen between a rule of thumb and the borrower’s offer price, hear the prospective buyer out. There may be compelling reasons why the rule of thumb is off point.
Call our Lender Hotline or anyone on our M+A team at 404-874-6244 for more information.
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