Evaluating a prospective M&A dealership transaction is a major undertaking. Both buyers and sellers must collect and analyze relevant and reliable data to enable informed decision-making. To achieve this, the parties must rely on proven methods to evaluate M&A deals. Moreover, these methods must be continuously utilized and improved to help the parties develop established M&A evaluation processes.
The Role of Data in Evaluating M&A Transactions
According to studies, some 70 to 90% of M&A transactions fail. While there are many reasons why an acquisition may fail, one of the biggest causes of most failures is a lack of follow-through. Investors, employees, and even customers need to understand why the deal is a good thing for them and what they can expect throughout the process. Yet the feedback of these stakeholders is often overlooked, or if it is collected, lacks objectivity. For instance, a prospective buyer may call the target’s customers to perform a reference check interview. These interviews are often filtered with customers saying what the buyer wants to hear, and therefore, lack the value of true, candid customer feedback.
Relevant and reliable data enables strategic decision-making by providing insights into key market trends, competition, and growth opportunities. These insights help buyers identify targets that best align with their strategic objectives. Moreover, M&A due diligence is a data-driven process. Both buyers and sellers utilize data to assess key factors such as the true value of a company, negotiate a fair price, and identify risks.
Gathering and analyzing reliable data is not only critical in the due diligence phase, but also following the transaction. Data gathered post-transaction helps both buyers and sellers determine how well a particular deal served their objectives. These insights can be used to inform future business transactions, as well as help refine the parties’ strategies for future acquisitions. But to achieve these objectives, parties must choose effective methods to evaluate transactions both pre- and post-merger.
Effective M&A Evaluation Methods
Many methods can be used to evaluate M&A transactions. Some of the most effective include:
- “Comparison shopping” similar on-market businesses
- Measuring valuation against recent transactions
- Interviewing senior staff at both the primary business and the new acquisition
- Performing customer satisfaction surveys over time
“Comparison Shopping” Similar On-Market Businesses
One of the best methods to evaluate an M&A deal is “comparison shopping.” This market-based approach involves looking at other on-market businesses to help estimate the value of the target company. But this method is only effective if the companies selected are truly comparable. For instance, if the target company is a large dealership located in a major metropolitan market, a small family-owned store located in a rural area will tell you little about the value of the target.
Therefore, one of the most important steps involved in this approach is the initial screening process. To identify relevant on-market businesses, buyers must utilize criteria such as:
- Geography. This includes factors such as customer demographics, market size, and revenue mix.
- Company Size. Look for businesses with a similar number of locations, employees, and revenue.
- Product Mix. The more similar to the target, the better.
- Financial Metrics. Key metrics include revenue, net income, and EBITDA.
- Valuation. Multiples employed (i.e., EV/Revenue or EV/EBITDA).
Once relevant comparisons have been identified, it is necessary to calculate a range of valuation multiples and apply them to the comparison targets.
Measuring Valuation Against Recent Transactions
This method is similar to the one above, but involves looking at past M&A transactions to value the target. Similar screening criteria are utilized to identify comparable businesses. The terms of each transaction are then evaluated to determine the multiples utilized. Those multiples can then be applied to the corresponding financial metrics of the target company to calculate a range of estimated values. However, it is important to consider and weigh any significant differences between the target and comparable transactions.
Interviewing Senior Staff at Both the Primary Business and the Acquisition
Culture is critical to a successful merger. Gathering and utilizing feedback from senior staff helps determine whether a deal will work from a corporate culture perspective. While larger companies may have experience integrating new acquisitions, for many acquired companies it is often their first M&A experience. Employee feedback can help the buyer understand the new company’s culture to ease the integration process.
Gathering staff feedback is also valuable post-merger. The integration team can understand and anticipate challenges that may arise, as well as how key decisions were made and communicated throughout the organization.
Performing Customer Satisfaction Surveys Over Time
Performing customer satisfaction surveys both pre- and post-merger can provide important insights. Pre-acquisition, they tell the buyer about the target company’s customers’ needs, preferences, and behaviors. This information can be used to maintain and improve services while identifying growth and expansion opportunities. The acquiring company can also determine the level of brand equity associated with the target company to identify potential risks. Moreover, measuring customer retention helps to further identify risks and assess the value of the target company.
Post-acquisition, customer satisfaction surveys yield key insights that can improve integration planning for future transactions. This helps maintain customer satisfaction and retention, while also providing valuable feedback about the buyer’s brand and the quality of its products and services.
DCG Can Help You Make Informed Decisions
DCG is an industry-leading full-service automotive M&A firm. We take the guesswork out of transactions, helping both buyers and sellers to get the best value through data-driven decision-making. Our experienced and committed team has a variety of past experience as M&A attorneys, accountants, former OEM executives, and former dealers, and maintains a proven track record of delivering transactions that consistently exceed our clients’ objectives.
Contact DCG Acquisitions today to speak directly with an automotive M&A specialist and learn how our expertise can help you get the most out of your next dealership transaction.