With the Markets awash with Capital, unsolicited M & A Buy-side approaches ratchet upwards and Private Equity focus intensifies.
Deals In Abundance
Since 2014, there has been a sustained level of annual M & A investment across North America and Europe in excess of $3Trillion. Strong interest in Private Equity investing has flooded the capital markets and consistently low interest rates have helped fuel M & A activity levels.
The first half results for 2018 show no signs of slowing things down
This latest graphic H1 2018 update from Pitchbook clearly demonstrates the on-going strength of M&A deal flow, but equally shows the impact of recent mega-deals in driving down deal value.
A recent Trends Report, published by Deloitte cited the primary deal drivers as technology acquisition (19%), digital infrastructure builds (16%), corporate transformation (17%) and smaller talent-driven bolt-on acquisitions (15%).
While 35% of completed deals were corporately driven strategic sales, Private Equity now accounts for the “lion’s share” of deal volume, which is making lives interesting, but potentially distracting and confusing for middle market CEOs and CFOs, as they are all too often pitched a “deal a day’ by ever more voracious young MBAs out to make a score.
Exit Readiness is a significant Issue
Boomer owners are aging, and the SME sector is continuing to expand, such that it is broadly projected that as many as 12million North American businesses are set to change hands from Boomers to GenXers and Millennials over the next decade.
With the potential value of these transactions projected to exceed $10Trillion, an in-depth study by Securion Financial carried out in late 2016 provides a cautionary note, in that 72% of SME Business Owners had no Exit Strategy in place.
This statistic alone projects that Owners may be being tempted or bullied into submission — without any real awareness of the true value of their business.
In our experience, the core concept behind making a successful exit for most business owners is one of converting the years of hard work, risk and personal sacrifice into hard cash and liquidity.
Getting there, requires careful thought and planning to ensure that the optimal results are achieved. As the graphic below depicts, reacting to cold calls without prior thought and planning can have devastating effects, since without an objective Exit Readiness assessment and prior independent Valuation, decisions made are often premature and ill advised. While valuations are reaching record levels, unprepared sellers often leave millions on the table by not having a clear exit strategy. In addition, many unprepared sellers face disastrous consequences resulting from a slowdown in their business performance due to the incredible distraction that occurs when a prospective suitor shows interest.
Best Practices for handling Unsolicited Approaches
Navigating these heady strategic waters, with only limited experience selling a firm often means owners don’t get best value from it, due to the Buyers’ “Capping” process as shown above.
Simply put “capping” is the introduction of successive market, industry and company-specific issues into the negotiation, to force down the sale price and increase the potential for incremental buyer profits, when they in turn make a subsequent strategic sale.
Professional buyers, such as PE firms and strategics are very sophisticated and thorough. They are willing to pay high multiples for quality companies. But they are rigorous in their due diligence and will find every little blemish one can imagine. Once they have you tied up, the advantage shifts to them as they whittle away at value with multiple “adjustments”.
Ideally, Sellers should have identified, planned and followed a clear strategic pathway – enabling them to make an informed and considered decision to sell, knowing their specific value drivers. It takes a great deal of work and preparation to keep the advantage on your side during the sales process. This typically includes a number of strategic, financial and operational improvements. The selection of a qualified M&A Advisor to objectively and unemotionally manage the process will absolutey optimize results by achieving a much higher valuation and ensuring the deal closes. In addition to having an experienced M&A advisor manage the sale process, it is critical to work with an advisor prior to going to market to make sure you are ready for the pressure a sales process will bring on you and your organization. Pressure testing your exit readiness is a wise decision.
By having an objective Valuation and Exit Readiness Assessment carried out, Owners can ensure that SELL is the right strategic option to choose? In our experience the key triggers should be when an owner has lost his all-consuming passion for the business – feeling that younger blood is needed to combat the industry turmoil that competitive inroads and disruptive new marketing and technical approaches have created and perhaps when the lure of enjoying the spoils of their years of hard work significantly outweighs the on-going burden of financial risk and personal guarantees.
However, since unsolicited buy-side approaches are clearly part of the current M&A picture, we recommend that Business Owners follow our 4 GOLDEN RULES:
THE BOTTOM LINE…..Get some Advice
If you run a quality firm of any size, you will be approached by buyers interested in acquiring you.
As Business Owners or professional managers, you need to be prepared, or you could get drawn into a bad deal for you, and for your firm. En route you are also likely to experience significant wasted time and no end result. The time spent, typically becomes a huge distraction — leading to a downturn in business performance, which can significantly reduce your value in the long run as future buyers always want to discount any hiccups in your performance. It might not seem possible that one or two down quarters can impact valuation so dramatically, but given buyers want to see 3 years of steady upward growth, those few months can weigh down your value for years.
Also, once a sellers initial expectations are not met, regret and future wariness to sell are the likely result. Often the fatigue and frustration with the whole process leads owners to sell at a later date for a lower price, or to settle for a buyer that was not an ideal fit.
You are likely to sell one firm in your lifetime, but buyers have teams who do nothing but acquire businesses. The stakes are high, so follow the Golden Rules to maintain control. You don’t know what you don’t know, so don’t go it alone if you decide to sell. Appoint an Advisor, MultiVisory or someone else if you prefer….. it will pay back!
Kevin Astle is the Founder and Managing Partner of MultiVisory International. Having worked on both sides of the Atlantic and on both sides of the Client/Agency desk across North America, he brings an international perspective and deep, multi-sector knowledge and network to his Clients.
