Archive for category: Mergers and Acquisitions

You’ve built a rock-solid business. All the pieces are there—a great product, decent revenue, an extraordinary team—along with plenty of apparent demand in the market. A sale seems all but inevitable. So why isn’t anyone buying?

Because every step of an M&A transaction is designed for buyers to eliminate sellers or reprice the deal.  To truly understand why, you’ll need to think like the person on the other end of the transaction. You’ll need to channel your inner buyer.

I’m not suggesting you immerse yourself in M&A literature or moonlight at a private equity firm. Your inner buyer is probably better developed than you realize. In fact, if you’ve ever purchased a home, you have essentially the perspective and experience you need.

Business Deals and Real Estate Deals: Not That Different

Consider the characteristics that make a home desirable or not: its size, its current condition, its potential future value, where it’s situated, the value of similar properties, and so forth. Virtually every factor influencing a real estate investment shows up in an M&A transaction as well.

Buyers are looking for assets that meet or exceed an extensive list of criteria. Like savvy home buyers, they’re not willing to settle or simply say “yes” to the first option presented. They’ll take any opportunity to negotiate down the asking price. And when they have a bad feeling about a situation, they’ll walk away.

Stage 1: Browsing and Screening

Home buyers usually start their journeys by browsing and evaluating real estate listings on sites such as Trulia and Zillow. This high-level overview is where the vast majority of options get weeded out. If a home doesn’t align with the buyer’s overall requirements—if it doesn’t have enough bedrooms, for example, or is far out of the buyer’s price range—it doesn’t warrant consideration.

The same general process occurs in M&A, although there’s no Trulia equivalent for business deals. Instead, prospective buyers obtain basic information about a target—such as its profit margin, industry, customers, brand, and geographic footprint—by contacting the organization directly or through a “Teaser” developed by an investment bank or other intermediary. Although they can’t collect much data at this point, any early insights inform the decision to move forward but shape the buyer’s strategy and expectations. A seller who makes a lackluster impression, appears disorganized, or fails to communicate in a timely matter can anticipate tough negotiations ahead. That is, if they ever hear from the buyer again.

Stage 2: The Initial Walkthrough

Next come on-site visits and earnest conversations with sellers. In real estate, a buyer will tour a location to ascertain its condition and begin to plan any remodeling. In addition to the obvious issues and red flags (e.g. structural damage, poor workmanship, faulty wiring), curb appeal matters  : Is the asset well-maintained and looked after? How is the neighborhood?

Business buyers make similar appraisals—of their targets, of their targets’ positions in their industries or markets, of the curb appeal of the deal, and of the organizational leaders in charge. While parties involved in M&A transactions certainly do conduct walkthroughs, conversations with a seller are perhaps more important than the physical state of a given facility or office. A buyer wants to know that the company is well-structured, well-run, performing at high capacity, and rooted in a sound business strategy. Problems in the company’s foundation, so to speak, can end a transaction or significantly diminish the buyer’s idea of an acceptable price.

Stage 3: Thorough Investigation

After communicating about the deal and discussing it with their families (or close advisors and stakeholders), the parties decide on terms and price. Before agreeing to the purchase, however, the buyer typically engages in an exhaustive investigation. A soon-to-be homeowner will complete a home inspection, looking at the property from top to bottom. If problems are found they might even hire a structural engineer, pest control expert, or another specialist. From bad water heaters to outstanding liens, issues discovered at this point may destroy a seller’s goodwill and lead the buyer to rescind the offer.

Businesses have their own skeletons in closets. Liabilities that crop up during late-stage due diligence can and do torpedo practically-consummated deals. Perhaps it’s a misvalued asset, or a pending lawsuit, or the absence of a contract with a major customer, or the departure of a key employee, or a compliance gap, or a severe operational inefficiency. Whatever form it takes, whenever it emerges during the transaction, any source of risk can motivate a buyer to demand a lower price or withdraw altogether.

Ready to Sell? Talk to a Professional First.

As a business seller, you’re at a natural disadvantage. As soon as the transaction begins, the value of your company—and your asking price—can only go down. The secret to maximizing your return is to think like a buyer. That means anticipating and addressing every possible liability proactively, before your business goes to market.

Most sellers don’t do this. They underestimate the effort involved in M&A and assume their businesses are ready for sale. Can you blame them? Owners should believe in their businesses. They can’t be objective—they’re too close.

That’s why valuation and M&A advisory professionals exist. At Quantive, we’ve developed a system that eliminates guesswork for sellers. Our Market Readiness Indicator gives you comprehensive insight into how and when to bring your business to market.

To learn more about the Market Readiness Indicator and see how we can empower you in the single biggest deal of your lifetime, schedule a call with one of our M&A and Valuation experts.

Selling a business can be a stressful event. Given the size of the asset – and likely it’s importance to your retirement – you can just imagine that there are going to be some white knuckle moments. To reduce your anxiety level and increase your odds of success, here are five items to consider as you ramp up for a sale.

1. Create a Plan

With very few exceptions, selling a business is a pretty complicated event.  Put aside your preconceptions from the last time you sold a house- this is different.  All company’s are unique animals and you have to treat them as such when approaching a sale.  The time for planning is before you ever get the business on the market or start talking to buyers.  Some items to consider:

• How much money do you need from the sale?
• How much time can you dedicate to managing the sale process?
• Who are you going to tell about the impending sale?  Key employees?  Your accountant? No one?

2. Perform a Business Appraisal

You can’t possibly know if now is the right time to sell if you don’t have an idea of what your company is worth.  Even more, you certainly can’t effectively negotiate the purchase price if you don’t know the likely value.  Getting a professional appraisal complete – preferably by someone with both valuation and real world experience – puts you in the drivers seat when it comes to knowledge on value.  And worse case?  If the number doesn’t meet your needs it provides a roadmap to improving value.

3. Prep for the Sale

Selling your car?  You get it detailed.  Selling a house?  Good bet you’d spruce it up.  Why should a company be any different?  The only difference is the items that get spruced  The likely suspects are:

• Clean up the financials.  No personal expenses, no funny business, and the fewer “adjustments” the better.
• Literally, clean up.  First impressions on touring a messy business: either “I’m not buying this” or “I’m getting a discount”.
• Lock up key employees.  No one wants to buy a company where the core “assets” might walk out the door post-closing.
• Solidify Customers.  Recurring revenue is often the number one driver of value.
• Demonstrate Growth.  Higher growth businesses get higher relative valuations. Period.

4. Hire a Team

So you’ve done some planning and done some sprucing, now it’s time to get in gear.  To get the sale done on your terms, carefully consider your advisors.  Depending on the size of the deal the team often includes:

• Business Broker (for smaller companies) or M&A Intermediary (for larger deals)
• Transaction Attorney (find one that does a lot of M&A work)
• CPA
• Financial Planner (for help answering the question “Is this enough?”)

5. Negotiate in Good Faith

Finally, once you have an offer on the table and a buyer in front of you, the surest path to closing is to negotiate in good faith. I can relate countless tales of sellers that sought to carve out every last penny…. only to see their dream deal evaporate.  Seriously – ask me.  I can tell this story all day long.  The lesson learned is that the best deals are the ones where both the buyer and seller expect to give a little bit.  Negotiate in good faith and expect – or demand-  that your counterpart does as well.

Wrapping It Up

You can’t approach selling a company like it is a house or a car.  It’s vastly more complicated, and in most cases vastly more central to your overall wealth.  Putting a plan in place, doing the hard work to prepare, and then executing with the right team is the clearest path to a closing.