The Remedy to Risk

Risk in the Current Environment

Risk, real and perceived, is a critical factor in M&A. Risk informs valuation and drives deal structure.

The market today is full of risk. Factors such as the COVID-19 pandemic, increases in interest rates, inflation, and global supply chain issues have created an unpredictable economic environment. Risk, left unattended, can expand from reality into fantasy and can quickly deteriorate confidence. Determining what is real and what is not, is critical to completing a successful transaction.

Data is the Remedy

The best approach to minimize risk is to connect the story of the business with robust data. We have found that sharing data early in the process:

1. Quantifies identified risks and opportunities,

2. Facilitates in-depth discussions based on facts, not perceptions,

3. Equalizes knowledge between buyer and seller,

4. Reduces or eliminates surprises in due diligence, and

5. Increases the certainty of closing.

Acquirers approach investments with healthy skepticism based on known and unknown risks. It is impossible to remove all risk, but one must identify, quantify, and minimize the known risks.

Good data can illuminate past and current performance, set the groundwork for forecasts, and decrease investment uncertainty.

Example: The Logistics Industry

With the marked increase in freight rates across North America in the last year, many logistics businesses realized increased revenue and earnings. The risk to acquirers is that these elevated earnings may not be sustainable. To address this pricing risk, the parties quantify the impact of increased freight rates by analyzing detailed shipping data.

Analyzing the data and discerning trends in key figures such as revenue per shipment, profit per mile, revenue from new customers, and shipments per month, provide clarity on what has driven the changes in earnings.

Then, supplement the data with a review of macro-economic and historical trends to:

1. Contextualize – understand the impact of factors outside of the logistics industry,

2. Benchmark – compare company figures to industry averages, and

3. Forecast – review historical results to estimate future sustainability.

Completing this data-driven exercise uncovers the complete story of business and earnings performance in the past, present, and future. Minimizing the investment risk comes from understanding earnings and business trends independent of the known risk of fluctuating freight rates. 

In today’s market, acquirers are rightfully cautious. To get the right valuation with appropriate structure buyers and sellers must take extra steps to build confidence, reduce uncertainty and provide support for sustainable earnings. Our suggestion – use data as your guide.

Written by: Arjaan De Visser & Brad Kerkhof