“By failing to prepare, you are preparing to fail.” Yes, Benjamin Franklin knew his stuff (flying kites in thunderstorms notwithstanding). In the M&A world, if you don’t position yourself properly for a big deal, there won’t be a big deal.
But what does that mean, “position yourself?”
In this article, we’ll dive into the steps you should take—as a buyer or seller—to prepare for a deal and get the highest returns for your investment.
Knowing when to make a move is paramount. The transaction market has been red hot, as tax changes on capital gains rates remain a major topic of debate. For many sellers, this is the catalyst pushing them into the market sooner rather than later. For buyers, it’s adding more promising prospects to the pool.
On top of that, the private equity space is flush with cash. Lots of these players are working on closing out funds and starting new ones. If you’re a business owner, your phone’s probably been ringing off the hook.
Positioning yourself for success means getting absolute clarity around two critical factors involving the target company: customers and the supply chain.
Buyers need confidence that customers come along with the sale and that all contracts are in it for the long haul—especially the marquee accounts. They also need to understand the sourcing arrangements. Do vendors come with the deal? Are the existing contracts clear? Are there any special pricing or handshake agreements to uncover? What impact has supply chain shortages created for the company’s inventory levels and costs? What has the company done to be proactive: has it purchased inventory to overcompensate for supply chain shortages?
When it works in their favor, sellers should emphasize the above information as a lucrative benefit for potential buyers.
If you were making a graph, you’d see a clear correlation between the time required for negotiations and the likelihood of failure. Time, unfortunately, kills all deals.
Both buyers and sellers can accelerate the transaction process with a Quality of Earnings (QofE) report, which tells a richer story of a company’s revenue, supply chain, cash flow and growth potential minus any anomalies and outliers.
Buyers have a vested interest in the QofE process for determining a target company’s actual value and cash flow. For sellers, generating a QofE report of their own can eliminate surprises that significantly weaken negotiating power.
Financial due diligence is a given. Information technology and security due diligence deserve equal attention.
Recently, we’ve seen deals nearly fall through because buyers, along with reps & warranties (R&W) insurance carriers, were concerned with subpar compliance and security measures identified during diligence activities. We’ve spotted issues like these for sellers, who instituted fixes before buyers came around.
Likewise, we’ve uncovered challenges for unsuspecting buyers who successfully pushed back on a target to mitigate identified IT and security risk pre-close. Post-diligence, buyers have a clearer understanding of capital expenses necessary for gap remediation, along with go-forward compliance and information security activity expenses, so they can adjust financial models to accommodate. Again, this is not a time for surprises.
Cliché time: teamwork makes the dream work.
For both buyers and sellers, positioning for success requires expertly covering all the bases and finding out what you don’t already know. Bring in specialists like these to help you develop, craft and complete the transaction:
There are too many potential pitfalls and moving pieces involved with a major transaction to leave yourself open to risk. Besides, the transaction itself cannot take up all your time. You still need to focus on mission-critical activities.
By partnering with Sikich, you get a one-stop shop for all transaction advisory services, buying or selling. From due diligence to valuations to helping with the deal structure, we excel in areas that few firms our size even offer.
Make old Ben Franklin proud and prepare for success in your next big deal. Contact us today to learn more from our advisors.
This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.