ByDenis Reinhardt
How fast would Usain Bolt be if he were to compete in the 2024 Olympic Games? He currently holds the world record for the 100-meter sprint at 9.58 seconds. During a training session, however, he was injured and did not finish the run. Should the estimate for his future performance be based on these two races, or are they not representative?
Every buyer and seller inevitably faces the same question in an M&A process: What profits can the company generate in the future? Past years are a good reference point, but even here it is important to critically assess which effects and trends are relevant for the future and which are not.
The key word is normalizations. There are two general directions: What does not belong to the core business? And what were potential one-off effects? The rationale here is to present the financial situation as it would apply to a new owner. When we ask our clients about this, the most frequent answer is: No, there is nothing. This is where we as M&A advisors can generate real added value—by pointing out potential one-off effects that can ultimately influence the purchase price. This helps avoid unpleasant surprises during the due diligence phase and, in the best case, can also enable a better company valuation.
Common examples of one-off effects include insurance payments, legal costs, or asset disposals. Particularly when it comes to the sale of real estate or other valuable assets, large sums can quickly be at stake. Depending on the business model, these may also occur regularly. Here it is important to weigh the facts and build a consistent line of reasoning. Examples of recurring items that do not belong to the core business include vehicle costs not primarily used for operations, or other ongoing costs related to non-essential assets.
The goal must be to present a comprehensive and consistent picture. For example, deducting COVID-19 subsidies without considering a potential repayment of these subsidies would not be consistent and would only show half the truth. Here too, i-capital can support clients with an external perspective and by reviewing the reasoning to ensure consistent communication and negotiation.
It should be noted that there is no universal blueprint that can be applied to every company. An individual assessment with a view to the industry, the business model, and the company’s current situation is essential to identify all relevant normalizations and to present the company’s objective earning power.
More interested in M&A processes and transactions? Feel free to contact us!
Contact person
Philip Herrmann
p.herrmann@i-capital.de
