An M&A Expert's View of the Engagement Marketplace - Part 2: Valuation Issues
In Part 1, of this series of articles, Michael Mazer of Mazer Telecom Advisors LLC discussed merger and acquisition (M&A) activity in the overall engagement space. In Part 2, he talks more specifically about the landscape for buyers and sellers. Mazer has 25 years of experience in mergers and acquisitions and is now heading up an M&A business affiliated with The Engagement Agency LLC.
Q: How do you define the engagement field in terms of the types of businesses involved?
A: Based on the coming ISO standards and the Enterprise Engagement Alliance framework, the field is comprised of a variety of services, including, leadership training, assessment, communications (web, print, digital, face-to-face) learning, collaboration, innovation, rewards and recognition, analytics, etc. There are companies specializing in all of these various aspects of engagement, many of them on the smaller side.
Q: When it comes to valuations, how does this business differ from other businesses?
A: There’s a big difference, and it brings to light the challenges in this new market. In most other fields of business, there are usually significant tangible assets. In the engagement field, often the only basis for valuation for a buyer is EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), the base of customers, the pool of talent and perhaps technology, and sometimes a building, equipment, or rewards inventory.
Q: What other factors can affect valuations?
A: Valuations can rise significantly if a company is acquiring for strategic purposes; for example, to gain access to unique expertise, services and access to customers in the engagement space that the acquirer lacks. Buyers are looking to pay based on EBITDA and perhaps will increase the multiple based on a clear growth trend line or some other specific market advantage.
There are sometimes buyers who will consider paying higher multiples for companies that enable them to enhance the strength of their other holdings, create new revenue streams, open doors into new customers, gain access to expertise and provide better solutions for clients. We’ve seen a few acquisitions like this, such as the acquisition of Achievers by Blackhawk Network, MC Fina by HALO and Inspirus by Sodexo, that reflect a desire to expand the range of services offered.
Q: Will we see the type of elevated M&A activity in engagement field that was seen in the Internet, biotechnology and other fields in the past?
A: That is not out of the question. Who would have thought even a few years ago that investors would focus on engagement, or that ISO standards would come along to validate the field? It likely will take some time for these forces to play out.
Q: What do you think are the biggest questions for buyers?
A: As always, buyers must determine what they seek to accomplish. Are they trying to grow in their current market segment through acquisitions and hope to gain efficiency and scale? Are they buyers interested in broadening their capabilities and making acquisitions in other areas of the engagement marketplace? Or are they interested in making both types of acquisitions? After they make that determination, then of course there’s the process of finding the right acquisition in terms of the size of the target business, its sales growth trends, cultural match, business services, customers and talent, opportunity, technologies and other resources. Most buyers seek companies whose revenues are divided between many stable customers, who have low turnover in their sales and support talent, who have a clear growth track record and a compelling strategic plan. In service businesses, it’s not unusual for buyers to require the principal to sign a contract to remain for some period, with a portion of the sales price payable upon completion of any performance contingencies in the contract.
The success of an acquisition in the engagement space appears highly dependent on people, because generally the seller’s main asset is its relationships and position in the marketplace. While it appears that clients often stick with vendors for multiple years, these programs are often put out to bid every year or two or three, and I understand that margins can be tight. A lot of the stickiness is based on great customer service and software that clients don’t want to lose. Lose those relationships, or fail to offer a compelling platform or solution, and those clients slip away. Another challenge, or opportunity, is the ability to cross sell – to bring together services the sales forces in different business units have the capability to sell. This is almost always easier said than done.
Q: What are the big challenges for sellers?
A: There are probably more opportunities for sellers in the engagement space than perhaps at any other time – and just as many questions. I don’t think this is a field that has ever seen much M&A activity until recently. Many are relatively small companies, frequently started by entrepreneurs. The question is, will increased attention on the engagement space create the conditions under which there’s an increased interest from larger companies to make acquisitions? This is an important question for companies with management who are getting older and who are considering an exit.
Even more relevant: Is the seller large enough, or does it have sufficient strategic value, to warrant a purchase by a larger company? Does it have a solid growth record and path to further growth? Is there a strategic fit and/or cost savings for larger companies?
If a seller has an interested buyer, there are of course critical questions to ask about how the buyer would manage the company, especially if the seller has an earn-out and/or is concerned for the welfare of employees and customers. As previously mentioned, the seller may have to work at the organization for some period and will experience first-hand the consequences of the decision.
I think it’s always a good time to be thinking of the exit strategy, even if one has no immediate plans to sell. Unless there’s a family member or junior partner who wishes to take over, an entrepreneur should always be thinking of what an exit might look like and how best to prepare for it.
If a company is ready to sell, the first component is creating a formal plan that addresses the key issues outlined below. Most sellers don’t plan a sale; it often happens quickly, and therefore not always to the full benefit of the seller. Here are issues to consider in your strategic exit plan:
- Finances. Making sure the finances and other business details and metrics are accurately and clearly documented.
- Curb appeal. Demonstrating your company’s market leadership and position in a way that can easily be conveyed, such as through coverage in the business media, public speaking, or other thought leadership activities. How can you create a buzz around your company? Keep in mind that any such marketing communications efforts take time, which is another reason to plan in advance.
- Planning. Identifying specific companies or types of companies you believe would make the best buyer. It makes sense to keep a list of companies you might consider a good fit.
- Employees. Determining whom to tell what in your organization about your plans, and how to anticipate potential employee concerns.
Q: Should sellers wait to see what type of impact coming ISO standards and mounting pressure from investors could have on the market or M&A activity?
A: It’s very difficult under any circumstances to time the market, as any stock investor knows. I would advise companies that wish to sell to proceed with their plans because, despite the potential, there’s no way to predict what will happen or when.
Q: Why did your company choose to get into the engagement field?
A: It’s not often that one has a chance to watch a field develop over a long period. Because of my investment and involvement with the parent company of The Engagement Agency, I’ve had a chance to observe the field over many years. Often, when a new industry breaks through, it’s because of an invention of some kind and growth happens quickly. Engagement is more complicated than that. It’s an approach to doing business, and change of this nature takes time. When I initially got involved, I didn’t anticipate the degree to which the field could potentially catch on – that organizations such as ISO would be creating standards, that major investors (e.g. CALPERS) would specifically pressure public companies to invest in human capital and engagement.
On paper at least, everything is in place for this field to undergo significant growth. If so, it will create significant opportunities for both buyers and sellers of companies in the field. Having watched the field for over a decade, I’m pleased that our company can be there ahead of the game and is well equipped to assist buyers and sellers.
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