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How sellers can bridge a valuation gap and realise their expectations

Aiming for a buyer that is the right fit for your company can help when it comes to meeting on price

Sellers will often place a higher value on their business than prospective buyers. What is the best way for them to realise those expectations?

Various factors can feed into the company’s sale price. These can include the level of competition in their particular sector, growth potential and private equity interest in the sector, says Gavin O’Flaherty, partner at Eversheds Sutherland.

“There can also be company-specific issues, such as any litigation or negative interaction with the Revenue Commissioners, for example,” he adds.

The seller’s business background, in respect of such areas as legal compliance, corporate record keeping and tax history, can have a crucial bearing, says O’Flaherty.


Market conditions are another key driver of price, says Paul Tuite, deals leader at PwC.

“Dealmakers will be facing very different conditions in 2024 to the past few years and will need to adapt their approach accordingly,” says Tuite.

“For example, although global credit markets have reopened, financing is more expensive than it has been for a decade. The higher cost of capital will put downward pressure on valuations and require dealmakers to create more value to deliver the same return as before.

“As the wider macroeconomic and geopolitical landscape remains uncertain, dealmakers that are able to assess risks and plan for different scenarios will be more confident taking actions than those who may be waiting for greater clarity to arrive.”

Valuation variations

From the outset, it is crucial that the shareholders determine what they want to achieve as part of the transaction, says Ronan Murray, EY corporate finance partner.

“Valuation, of course, is a key factor, but there are many other elements that contribute to a ‘successful’ transaction,” Murray adds.

“A seller should do their homework to set realistic value expectations before entering a process. Through their experience and resources, corporate finance advisers play an important role in guiding these expectations. The seller should understand their business’s value drivers more than the buyer, so the onus falls on them to demonstrate the maximum value.”

As the growth potential of a company is factored into a valuation, it is common to see an earn-out mechanism introduced, Murray says.

“This involves the seller receiving an initial payout on completion of the deal and later payments typically contingent on the future success of the business,” he adds. “The value of and the duration of the earn-out can be an effective method to navigate the valuation gap.

“With the earn-out in mind, it is important to remember that a seller is likely to work with or for the buyer for a period post transaction. Therefore, maintaining a good relationship throughout the process should always be considered and can facilitate more open negotiations on the valuation gap.

“The sellers and buyers can ask their appointed advisers to have the difficult conversations on their behalf to protect that relationship going forward.”

Assessing the value

Buyers will have differing views on the value drivers within a business and, therefore, the inputs into a valuation but tend to follow established processes to determine the business’s worth, says Fergal McAleavey, corporate finance partner, EY.

“With private M&A being the most common transaction type in Ireland, the most commonly used processes are a market-based approach which involves comparing the market prices of comparable businesses that have recently sold or are publicly traded,” says McAleavey.

“Typically, this involves looking at the valuation as a multiple of the target’s profits or revenue, with that multiple then being applied to the business being valued.

“A discounted cash flow approach values the company based on forecast cash flows that have been discounted to account for the time value of money and the riskiness of the investment.

“Finally, an asset-based approach is one that values the business based on its net assets. Although a company may not be generating a lot of profitability, it may have the assets in place to deliver a critical service or quickly increase profitability and therefore intangible assets can also be considered in the valuation.”

Dealing with discrepancies

If after initial engagement there is still a discrepancy between seller and buyer on the sale price, sometimes this be dealt with through an earn-out or a deferred consideration, allowing a seller, to an extent, to justify their higher valuation of a business, says O’Flaherty.

“There could also be a holdback arrangement whereby certain of the consideration is held so as to allow certain earnings and achievement criteria to be satisfied,” he adds.

Getting the best price

A number of factors must be considered when it comes to getting the best price for your business, says Mark McEnroe, corporate finance partner, PwC Ireland.

“Firstly, it is really important to ensure that every aspect of the business is showcased to its maximum potential,” he advises. “From a financial perspective it’s about highlighting the earnings profile and cash generation of the business in the recent past and into the medium term.

“Recent investments to position the business for growth should be highlighted and key capabilities – for example, in areas such as technology, digitalisation and ESG – should be highlighted.”

Finally, it’s about understanding developments in your sector and also being really familiar with your buyer universe, McEnroe says.

“You should work with your advisers to research the market positioning and strategic plans for any potentially interested parties locally or internationally. In doing this, you are aiming to identify a buyer for whom your company is an ideal fit as well as confirming that they have the financial capacity to complete the transaction.”