Putting a value on any company can be a complicated endeavor. This becomes even more complex when dealing with a highly cyclical and competitive industry like the oil and gas industry. One month to the next can see the value of your company change by millions of dollars. The value can be driven by political forces, news articles, wars, pandemics and many other factors. There are many factors that you can’t change, but that doesn’t mean that you shouldn’t focus on the factors that you can affect.
The different types of acquisitions
There are different types of acquisitions that you can focus on. These depend on your position in the industry and the current market condition of the industry you are in.
The Roll-up Strategy
This type of acquisition is designed to merge companies together that have similar equipment or services. There are multiple reasons to do this.
- Reduce overhead by sharing administrative resources.
- Increase equipment or service utilization.
- Reduce competitive pressures through consolidation.
Roll-ups are used in situations where you can save money or increase margins by joining the two companies together.
New Market Opportunities
The New Market Opportunities strategy is for companies that want to enter new markets or gain access to customers that have a high-switching cost or high barrier to entry. A good example here is if a company is currently established in the Permian Basin, Eagle Ford Basin and Haynesville shale but would like access to markets in the northeast. The quickest way to navigate entry to a new market is to acquire a company that is already operating in that market.
Another example of this strategy is to get access to operators that are hard to get a foot in the door with. The reasons for this may be that they are utilizing equipment or software that has a high switching cost or if they are not allowing any new MSAs. By acquiring a company that is already working for an operator, it will be much easier to add additional services.
Innovation or New Technology
This strategy is limited in the sense that you will have to have new technology or innovation but the sale multiples can be much higher. This is very common in large technology companies and it is much quicker to buy new technology than it is to develop and test it yourself.
A turnaround acquisition is common for private equity. These types of deals focus on companies that may just need new management, an influx of capital or other factors that cause the company to be bought and turned into more profitable versions of themselves.
In the oilfield services industry, this can be common in downturns when the industry contracts and business owners can’t afford to keep operating the company or just no longer care to keep running the business.
What does this mean for my business
You don’t need to decide what type of acquisition you are looking for if you are thinking about selling your company. If you don’t have any new technology or innovative capabilities then obviously that strategy is off the table. If your business is otherwise strong and you don’t need to sell anytime soon then more than likely a turnaround acquisition isn’t going to bring you the most money. The importance of knowing what makes a company valuable is so that you can build the most value into your company before you are ready to sell it.
What factors decide the value of your company
The value of your company is what someone else is willing to pay for it. This may sound simple but it helps to look at it this way. Sometimes it is hard to step back and get an objective view of your company. Business multiples are used by many to get a quick assessment of a business’s worth.
- 2 – 4x EBITDA
- 65% Annual Sales (inventory included)
- 2.8 – 4X Seller’s discretionary Earnings
There are other rules of thumb and benchmarks but these are only a starting point. What we are concerned about are the inherent qualities of the business that are harder to replicate and take time to build.
Does your company have a winning strategy? Everyone has a strategy, even if you don’t. By winning strategy, I mean an explicit plan to leverage your organization’s capabilities into a unique competitive advantage.
Developing a winning strategy is not easy nor quick but the return far exceeds the cost or time invested. The exercise alone is enlightening and helps those involved to take a step back, clear your head and get a full understanding of where the business is at and where you want to go.
Once you have developed or renewed your strategy it is useless unless you communicate it to the rest of the organization and give them the ability to execute on it.
Human Capital, often called the most important asset in a company. It’s much more than just the right people, it is having the right people in the right seats doing the right things.
The people component includes the things about them that you cannot change, such as their behaviors and culture, but also the things that you can change. Their knowledge and experience. People are the ones that help you develop and execute your strategy.
The structure of your business is how your organization is comprised and how it goes about achieving objectives. Once you have the right people, structure is making sure they are in the right seats.
Every person that works for you is unique and the structure of your company will likely by unique as well. Getting the right structure means assembling departments and teams to take advantage of your capabilities and encouraging the best communication and collaboration in your organization.
Systems are how you get things done. These are your processes, procedures, policies, frameworks and methodologies. These are the rules by which you play. Systems dictate consistency, efficiency and productivity. Systems drive continuous improvement.
Great systems are simple. You can’t run a company efficiently on processes alone. Processes take days to develop. You can’t run a company consistently on procedures alone. Procedures are outlines for specific job tasks. You need to have a system for your system that allows depth of detail in processes and the aim of consistency in procedures. When you have processes and procedures that function together you can achieve true continuous improvement from the bottom up.
Your culture is the characterization of the entire organization. The behaviors of the people in your organization that contribute to the collaboration and cohesiveness of your organization.
The sum of its parts is greater than the whole. Culture is the superpower that enables your company to reach great heights. A study of every great organization will find a great culture at its heart.
How do these attributes add value
These are the five internal forces of any company. These fit together inside an organization like the gears inside of a transmission. When these are all optimized and synchronized they add tremendous value to any organization. The first things that come to mind when people talk about the value of their company are the numbers.
- Profit Margin
The next things they talk about are external forces.
- Amount of competition
- Industry trends
- Ease of replication
The last thing, and the most overlooked until last, are the internal forces. These are also the things that drive the numbers and reduce the swings from external factors. They not only drive the acquisition value of your company, but they also put more value in your pocket year after year.
- Who is the current management
- What is the structure of the business
- What systems are already in place
- What is the culture
I hear a lot of people say “the one key to a good business…” there is never one key. If there was only one thing you had to get right then every business would be successful. You must focus on the organization as a whole. Take into account all of your capabilities, where you are and where you want to be.
How can Fulcrum help
Fulcrum Development will help you prepare and market your business for maximum results. We have a proven business framework to help you measure, develop and facilitate your business strategy. Email or call us today for a free seven-point evaluation of your business. We can also provide you with a free valuation report of your business.