Strategic value is not the same as fair market value, where a “hypothetical” buyer and seller have access to all relevant data. Strategic value includes synergies and special features, usually hidden, that give the buyer a quicker, less costly and lower risk way to achieve goals. Look for the following opportunities to help clients capture as much strategic value as possible:
Entering a new market.
CPAs
with a good understanding of the client’s business and product line
can analyze the market for competitors who could beneficially expand
by acquiring the client. A Midwestern company looking to expand to
the East Coast could buy a competitor already established there; or
a company hoping to expand its sales of machine parts to a new set
of customers could acquire a company that sells an unrelated part to
the same customers.
Patent or secret process.
Clients
are usually so mired in the daily operations of their business that
they overlook the value, or particular benefits, of unique qualities
of their processes. A CPA appraiser can help the client see the
bigger picture and identify possible buyers who could better exploit
those processes.
Competition.
Help
clients determine their effect on the competition’s bottom line
through a sales/gross profit analysis by types of products and
customers. For example, a secondary line accounting for a small
percentage of the client’s sales might account for their
competitor’s disproportionate attention to these items.
Alternatively, a new product market might not be large enough for
two companies.
One-stop source.
Combining
two or more companies can create a major niche player. A CPA’s
trained questioning along with an examination of the customer base
by industry and product line or business referred away can lead to
an “aha” moment. Example: A tax preparation company can acquire a
seller of annuity and mutual funds.
Buying a vendor.
Some
company requirements limit new vendors, such as a retail chain that
only wants 10 suppliers of a product category. Your client is a
supplier that sells to the retailer. A larger company wants to buy
your client’s company in order to sell to the retailer. Guide the
client by calculating the value of the retailer to the potential buyer.
Reputation.
Acquiring
a small but long-existing company with an established reputation can
enhance opportunities for a newer business. Calculate “strategic”
value in terms of potential added profits or value enhancement to
the targeted buyer.
Source of supply.
Your
client is the sole source for a critical part for one of its
customers. To ensure continued supply, the customer proposes buying
your client. To determine the strategic value, the CPA appraiser can
model the possible negative effects of a loss of the supplier as
well as the costs of adding a second supplier.
Human capital.
It is
normal for a company to buy another company to gain access to
skilled and experienced staff. The cost of acquisition can be less
than finding, hiring and training the appropriate staff. CPAs can
project the “investment” in the personnel employed by their client,
establishing a parameter of strategic value.
Ego value.
A
business could have intangible bragging rights and “association
with” value. A successful local attorney or insurance agent might
get ego value from owning an unprofitable local minor league team
because of the added business they will get through the ownership,
making the investment worthwhile. The CPA can calculate the benefits
of the potential value to the right owner, therefore, setting the
strategic value.
—By Edward Mendlowitz, CPA, (emendlowitz@withum.com) a partner in WithumSmith+Brown, New Brunswick, N.J., and author of The Adviser’s Guide to Family Business Succession Planning (AICPA).
