Selling points: four M & A pros explain how they evaluate companies.

• Author: Washington, Paul

An estimated $800 billion of capital is currently available from private equity funds to acquire companies, and even more capital is accessible from acquisition-minded corporations looking to gain access to additional customers, additional "know-how" or additional capacity by acquiring or merging with competitors.

With an unprecedented amount of capital now available to acquire companies, the financial rewards of building, owning and selling a well-managed, profitable enterprise are staggering when that capital seeks out your company for acquisition. Owners who want to maximize the value of their enterprises should make a concerted effort to understand what private equity investors are looking for when considering an acquisition or merger of a company.

Colorado has a small but accomplished private equity and investment banking community. This article offers the views of four professionals who have had specific experience in mergers and acquisitions and who can speak to what they look for when evaluating a company involved in such a transaction.

EXPECTATIONS OF THE BUYER

Curiously, the characteristic of a business that was most important to the professionals interviewed for this report is the value expectation of the business owner. The price at which owners are willing to sell their companies must be in line with reasonable expectations of rational buyers. "You first want to make sure there is a basis to put any deal together," says Scott Maierhofer, co-president of the Colorado-based investment-banking firm Green Manning & Bunch.

There are several methods of valuing a company that are accepted by the financial community. One such method, discounted-cash-flow (DCF) valuation, is based on the projected cash flows of the enterprise. The DCF is particularly useful in determining the intrinsic, financial value of the business. Any difference between the valuation expectations of the owner and the amount that can be reasonably justified by the DCF method is referred to as "goodwill." In other words, goodwill is the perceived strategic value to the buyer that will be gained by owning the company.

Invariably, private equity investors, business owners and their investment banking advisors have a difficult time agreeing on the fair-market value of the company. Most often this is because the parties ascribe entirely different values to the strategic benefits of owning the enterprise. The investment banker plays a key role in educating the owner on...