Confessions of a Corporate Dealmaker

Projections - Talent vs. Bodies

Sorry the posting has been a little thin lately.  I'm bogged down consulting on a couple of deals, so when I received a set of projections tonight, I thought about blogging.  Before I opened the file I bet that the huge increase in sales that I would inevitably see would be primarily the result of hiring more sales people, a lot more sales people.  Right again.

This assumption usually doesn't work.  I've learned this the hard way more than once, but I think I've finally got it.  The assumption often comes packaged with words like leverage, cross-sell or exploit and always includes new markets or products, but the net-net is that a lot of new sales people need to he hired.  Unfortunately, it's in almost every set of projections I see.

Bill is one of the best Sales VPs I know.  He's been around a while and seen a lot.  We met on a deal several years ago and still stay in touch.  Oh, and he hates hockey stick projections as much as I do because he's usually on the wrong end - i.e. making them happen.  Bill hires talent not bodies, and he's always actively recruiting.  Bill knows all of the best reps in his industry - tracking them, dialoging with them, watching them.  When his company looses a competitive sales pitch, he always finds out who the winning rep was on the other side.  When he goes to trade shows, he watches other reps to find talent.  He's always asking other people who the good reps are.  In fact he even uses his SFA app to keep track of the good reps in his industry.  Bill is a smart guy and really good at what he does, but he despises hiring a bunch of bodies just to try and hit a forecast.  That usually means he folds up his tent and goes somewhere else.  BTW - the best reps usually follow him out the door.

If you were selling your company to me, I would pay you more if you rolled out someone like Bill with a reasonable revenue plan and trajectory than I would if you showed up with a bunch of bankers wielding Excel models proving that sales will increase at an increasing rate.

Projections

I wrote a post recently on projections and why I don't like or use them when valuing a company.  If you are a regular reader you know my disdain for using DCF as an acquisition valuation method, and projections are the heart of every DCF.  Does that mean you shouldn't have or use financial projections?  Not necessarily.

When I'm looking to buy a company, I like to see past budgets and variance reports.  Show me the stuff put together by the line managers, sales managers and controllers; not the stuff constructed by your investment bankers.  If you're selling your company today, all I need to see is the operating budget on a monthly basis for the rest of this year.  I don't need to see a 30-sheet model detailing your financial future through 2011.  I create my own projections for targets and usually assume revenue goes down and integration costs outweigh synergies for the first year or two.

What I really find helpful is when companies document and memorialize their budgets and variance.  Here's how - when you create your company's operating budget for next year, document the detailed input from the various managers who created it.  Then you and your CFO should certify the budget with its assumptions by having it notarized.  At the end of the first quarter in your budget cycle, using your variance report, write a MD&A.  Instead of just comparing past results, also compare the most recent quarter's results to your budget for that quarter.  Go into great detail as to why you hit or missed your numbers.  Again, certify the variance report and MD&A by notarize it.  Do this every quarter.  Showing me several years of this kind of information is not only intelligence vs. data, but also gives me some insight into your managers' abilities.

Now That's What I'm Talkin' About

No inebriated hillbillies were harmed in the making of this blog.

Valuation Round VI - Projections

Well yesterday's post has certainly been the most controversial to date.  I received a lot of emails today from readers, or maybe former readers, complaining that my tactics to "bust-up" a target's DCF analysis are "dishonest", "deceiving" or "unethical."  One reader mentioned that, "It's just a poor way to start the deal process by tricking the seller ... and doesn't build any positive goodwill going forward."  On the positive side, I'm apparently qualified to work at Gitmo (see the Comment on the post) and a very nice Excel Product Manager from Microsoft emailed to thank me for the input on manual recalc, as they are considering taking the feature out - seems no one's been using it but me.  It's amazing how blogs travel!

I don't feel like the tactics I use are meant to deceive.  I use manual recalc to simply get the selling team to focus on the granular aspects of their projection assumptions without being jaded by the end result.  What's ironic is that I'm really trying to get to the truth.  I worked in investment banking too long and saw too many DCF's reverse-engineered to achieve a pre-destined result.  Meetings like this are hard, and they often end in an uncomfortable way with the sellers feeling angry and/or embarrassed.  But I don't rub it in anybody's nose; there are no fist-pumps or high-fives on my side.  I try to act professional and treat people with respect and dignity.

I don't like having to use tactics like this, but in every acquisition I've seen, the projections were "hockey sticked".  While in almost every case post-deal revenue went down instead.  Hugh McColl always assumed that 30% of the acquired revenue would walk.  Without that assumption going in, he said the deals would have never worked.  Besides, if your projections were realistic, why would you be selling?  By the way, don't embarrass yourself by justifying your projections based on what your company could achieve as part of my company.  I don't pay for synergies that I have to make happen.

Valuation & Projections

Today I will start a new series on valuation and projections.  The goal of this series is to provide a better understanding of how corporate acquirers value transactions, and how you can plant seeds today that will make your company more valuable to both of us in the future.  Let me start by making some clear statements about valuation, which we'll explore further in the coming weeks:

• Sellers always value their company, where as I (the corporate buyer) always value the transaction.  The two can be very different - I'll explain why.
• Traditional valuation methods (DCF, precedent acquisitions, public comparables) are more relevant for raising money than for selling your company.  I'll show the methods that most corporate buyers use.
• In terms of projections, past performance is always indicative of future returns.  Leave the hockey sticks at the rink.  I'll explain how you can give me projections I can believe.
• Understand your cap table and liquidation preferences relative to your valuation, and make sure that your shareholders' valuation expectations are aligned (Review your drag-alongs!).
• Lean companies are always more valuable to me, as I never pay for synergies.
• The most important thing I'll write about is how to build a strong valuation case based on providing me real and relevant intelligence vs. data.