Firmex and Mergermarket recently published a report entitled Mid-Market M&A: The Valuation Gap (the
Report), which explores valuation challenges that
buyers and sellers are facing in mid-market M&A.
According to Mergermarket data, the number and value of American
and Canadian mid-market M&A deals (US$10m to $250m in value)
slipped year-on-year, with the slump continuing into the beginning of
2016. The valuation gap between buyers and sellers may help to
explain why mid-market M&A momentum has stalled, despite high
Some experts contend that the valuation gap is in part due to
the prevailing expectations of sellers, which are driven by the
widespread publicity received by lucrative M&A deals and
attractive valuation multiples for businesses across a broad range
of industries. The availability of credit and heightened
competition for high quality mid-market businesses has raised
valuations for select companies which, in turn, are widely reported
in the press. On the other hand, average and less attractive deals
receive little press. As groups such as
baby-boomers look to sell their businesses, reports of
attractive valuation multiples may be an important motivating
factor. However, their valuation expectations may not be realistic
or applicable to their specific business or circumstances, which
may pose difficulties as they negotiate with potential buyers.
The valuation gap is also an issue in highly speculative
industries, such as the technology and life sciences industries.
While the potential for upside in these sectors is alluring, the
inherent risk and speculative nature of these businesses make them
difficult to value and often invite closer scrutiny from
In light of the above, how can buyers and sellers confront the
valuation gap and complete a successful M&A transaction? One
useful tool is to use an earn-out to tie a portion of the business
price to the post-closing performance of the business. Helpful tips
for negotiating earn-out provisions have been addressed in a
previous post on this blog. Other techniques may also include
increasing the proportion of management equity rollover, on the
theory that the interests of management and the buyer will be
better aligned, and spreading out buyer-side risk by bringing on
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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