The seminar “How to sell your life’s work?“ organised by Estonian Chamber of Commerce & Industry and Investment Agency was held on the 27th of October. It was already the fourth sequent seminar and the main focus this year was how to find the potential buyer to your company.
KPMS partner Margus Mets who is dealing with public relations talked about how to create public image of the company.
Margus talked about the value of image and how it influences the value of the company. He show the example of Coca-Cola brand which was valued at 130B$ in 2002 and the total value of the company assets was only 21B$. So five sixth of the total value was brand with its good image.
When concentrating on the marketing and communication keep in mind the old and current customers and don’t focus only on acquiring new ones. Also keep in mind the total potential value created when investing into the image creating and marketing.
M&A advising company Investment Agency partner Illar Kaasik made an overview of the different enterprise valuation methods:
- Market approach – valuation method ensures the most accurate outcome when valuation stable companies. Appraisers use in the market approach the market multipliers and compare them to the evaluated company. You can find the information from Damodaran databases, similar transactions that have been done on the market lately and from listed company’s multipliers.
- Income approach – valuation method ensures the most accurate outcome when evaluation growing companies. Using the income approach the future free cash flow is discounted to current value. The valuation model components can be found at the Damodaran database.
- Asset based approach – valuation method is used mostly when company is not profitable. In the value calculation don’t forget to deduct the assets sales costs like trustee, real estate broker fee, taxes and also the equipment and machinery transportation and dismantling costs.
Usually the appraisers use different methods weighted average by giving each of the valuation method bigger or smaller weight depending of the company development phase. When using the income or the market approach in the appraisers can use the Damodaran database to find components and multipliers. The database includes more than 41 000 public company data from around the world.
Aswath Damodaran is New York Stern business school professor, who has collected the public company data since 1998 and publishes all the information on its web page.
Trinti law office partner Tõnis Tamme spoke about the vendor due diligence. VDD will help the seller to tidy up its „closet“ and specifies the risks and how to minimize them. He also reminded that when selling all the agreements have to be in written from and the labour contracts should be in one format. You should also see if the relation between the parent, daughter and subsidiary companies are in order.
Of course the full topics to be covered are broader e.g. intellectual rights, brand name protection, property servitude issues. The companies with long history might also have risk in the company that arise from the changed legislation. The VDD is not always reasonable specially for smaller companies there the total cost might be too big concerning the whole transaction.
Tõnis Tamme also spoke about the reason why usually the deals are not closed:
- The important matters have not been revealed or are revealed to late.
- Risks are over or undervalued and the risk analysis does not include the substantive coverage and how to narrow them down.
- The potential risks/liabilities are above the tolerance level. VDD is a great tool to diminish such failure risks.
In the discussion panel the Finantskonsultant partner Jelena Scherebina gave recommendations how to follow through the financial and tax Due Diligence. She noted three aspects:
- Put in order you accounting – make sure that all the assets are included in the balance sheet and all the assets are in fair market value.
- Check if you only have in the balance sheet the necessary assets that are needed for the business reasons and if not there is a possibility to reorganise the company and transfer some of the assets to another company (by dividing the company, selling the assets etc.)
- Due to the Estonia tax law if owner wishes to continue investing after the sales of the company the owners should consider transferring the shares into company name before the sales process and also taking into account all the pros and cons.
M&A advisory company Prudentia associate Ivars Pikulis spoke about which kind of companies the Latvian investors might be interested. Prudentia is in the Global M&A network that unifies M&A advisers in 40 countries in five continents.
Ivars compared in its presentation Estonian and Latvian economy and also noted the case studies of the biggest deals between Latvian and Estonian investors e.g. Granul Invest expansion into Latvia, Food Union purchase of Premia Foods ice cream production, Latvijas Fineiris purchase of Kohila Vineeri factory and Eften Capital commercial real estate purchase in Latvia.
Starting from 2011 the Estonian companies have purchased 36 companies in Latvia and only 8 Latvian companies have purchased in Estonia. Latvian companies are more focused on the expansion to the south by looking at Lithuania and Poland.
Viktor Mironov from the Finnish Russian business consulting company Team Consulting Group gave recommendations how to attract Russian investors.
Although Russian investors remember along the Prague and Vienna also Tallinn, you have to take into account that Estonia is small economy and flight connection e.g. Prague are much better.
For the Russian investors personal relations are very important and there is language barrier. Also the Russian investors look for the control in companies and at least 15% annual return. They usually invest into known fields.
Finnish M&A advising company Translink Corporate Finance partner Mikko Katramo gave the examples of the transactions they have made in near past. Translink is M&A network that has over 600 advisers in over 30 countries in the world.
He spoke about the case studies of the: Kultakeskus MBO, HopLop sales to private equity company who needed capital for expansion into German market.
The main reason for selling the company for Finnish investors is the retirement of the current owners and the average age of their clients is 50+ and the eldest was 94 year old. Finnish economy has been in downward trend for the last three years and also the M&A transactions have declined three times. In 2016 there is expected to see growth. One of the growing sectors is Finnish construction sector. Mikko is expecting to see more IT sector transactions in Estonia by Finnish companies in near future.
But you have to keep in mind that Estonia is small economy and the total Estonian GDP is less than Helsinki although the total population is three times higher. For that reason Estonian market is not the most attractive for Finnish investors and for the near future the main reason might still be the cheap labour.
You can see the presentations here: http://www.koda.ee/koolitused-uritused/koolitused/kuidas-muua-oma/
Illar Kaasik Investment Agency partner
Eva-Ell Paalimaa Investment Agency communication manager