The Association of Language Companies (ALC) puts on its annual conference in Las Vegas on May 18-21, 2011.
Mergers and Acquisitions
Moderator: Shamus Sayed (Interpreters Unlimited); Panelists: Sayed Ali (Interpreters Unlimited) and Michael Sank (TransPerfect)
Nearly one-fourth of ALC member company owners are looking to acquire, and another one fourth are looking to be acquired (if the price is right). What do you need to consider if you are planning on acquiring another company or selling your own?
Q: How do you value your business? A (Michael): TransPerfect looks at M&A as an investment, therefore the valuation is based on cash flow – multiple of annual EBITDA. Depends on the growth rate of the company; want to break even in about 4 years. A (Sayed): Also looking at multiples of cash flow; age of the business; intellectual property. Looking also at comparable sales, and the top line.
Q: Who does recasting of the financials (in cases when a non-contributing spouse is on the salary etc)? A (Michael): It’s a mutual exercise to figure out the true long-term cash flow. Typically presented by the seller and the buyer goes through it with the seller then to determine the long-term sustainable cash flow.
Q: Is there a value put on long-term contracts? A (Sayed): Yes, if it is five or more years.
Q: What are you seeing in the market for guaranteed compensation and earn-outs? A (Michael): In our case we want people to stay on. Typically 50% is paid upfront and the rest over 3 years (could be more than 50% if things go well).
Q: Do you offer equity position? A (Michael): No. A (Sayed): We are open to that. Tied to certain goals.
Q: Is there a particular revenue size you are looking for? A (Michael): Only about 10% of our growth is from acquisitions. We are not trying to do a roll-up. $10 million is a good size, can be bigger or smaller. Interested in specialist companies. Transaction and opportunity cost needs to be considered. Typically look for $5 million as a starting point, but will consider $2-3 million as well.
Q: Do you consider corporate culture in acquisitions? A (Sayed): Very high on our list. Culture is the reality. A (Michael): Yes, it is a “relationship thing.” We are in people business.
Q: How does client concentration affect the valuation: A (Sayed): We are looking for 15% or less for client concentration (no client accounts for more of 15% in revenues).
Q: How about contracts in preferred class of vendors (e.g., minority owned business)? A (Sayed): We can form partnerships where the seller retains equity portion to retain the status.
Q: Are you looking at acquisitions outside of the US? A (Michael): About half or our acquisitions are abroad. A (Sayed): We are looking at an acquisition in Eastern Europe right now.
Q: Does it matter if the business model is B2B or B2C? A (Michael): We are a B2B company but will look at anything. A (Sayed): Same here.
Q: Is there one single thing we can do the increase EBITDA? A (Michael): Be a fast-growing company (but of course then you are not interested in selling…).
Q: How does TransPerfect integrate acquired companies? A (Michael): We try to go as light as possible on integration, try to keep the unit intact. We integrate accounting functions etc., but are not looking at relocating the acquired company or changing its structure.
Q: How do you reassure the seller in earn-out situation that your interests will be aligned when pursuing a certain revenue levels for particular clients? A (Michael): Sometime it’s a leap of faith. Due diligence is needed. A (Sayed): We want to have a win-win scenario; will have the seller be in a position to maintain existing relationships with the clients.
Q: Does ISO certification adds or decreases value? A (Michael): I don’t know why it would decrease it, the question is whether it increases value. If the processes are followed, it is likely to add value.
Q: What is the range for EBITDA multiples in our industry? A (Michael): Broad range is 4-6 multiple of EBITDA.
Q: What do you do in HR and IP during the due diligence process? A (Sayed): Background check on key individuals. Our focus in on financial performance as it relates to IP, employee agreements, human capital. A (Michael): Sometimes we do simple background check. Our due diligence is that we meet the seller. We like to meet the key employees before LOI is in place. We don’t value IP too much, we mostly look at service companies – there is no separate valuation.