This week on LinkedIn’s Valuation group Steven Storch (Imagem USA) asked “When writing a valuation report of a company on behalf of a strategic buyer, where would you include synergies, e.g. in the normalizing adjustments section or only in the actual valuation section?”
Rob Burkert (Burkert Valuation Advisors) advised:
If you know, the close-to-near certainty, the $ synergies and where they will occur (revenues or operating expenses) I would put them in normalization adjustments. If you don't know the $ synergies then follow the advice given to me many years ago by my lovely wife (a CFA). Do the valuation with the "normal" normalizing adjustments. Then take a range of "% of synergies to be achieved" and recalculate the company value. So maybe the buyer expects to increase revenues by 15% and/or cut operating expenses by 5%. Construct a table that shows the value of the company for different ranges of the synergies expected to be achieved - say 10 to 20% on the revenue side and 0 to 10% on the expense side. Presto.
The "% of synergies to be achieved" method works great when you are calculating an investment value for a seller if there are multiple synergistic buyers. You can run one valuation and assume all of the buyers' offers will fall in the range of the sensitivity table. In order to accomplish this, I ask the seller: Given what you know about your business and the potential buyers, what do you think those buyers would do with your company ... i.e., in terms of revenue enhancements or cost cuts.