“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.
UNDERSTAND THE MARKET
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.
KNOW WHAT YOU’RE GETTING
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.
ACT FAST OR DON’T ACT AT ALL
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.
LOOK BEYOND THE BALANCE SHEET
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.
Assemble your dream team
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:
- Investment bankers on the buyer team function like residential realtors. They learn what you’re looking for and deliver you options. Behind the scenes, they perform projections and crunch numbers ahead of the financial due diligence process.
Do not put this work onto the desk of your CFO. I cannot stress this enough. Yes, an acquisition pertains to finances and growth and projections. But keeping a company’s finances in order is its own full-time job. Adding a major M&A task into the mix is bound to have negative consequences. Besides, there’s a reason why people specialize in this work: it’s complicated. - Both buyers and sellers need an experienced M&A attorney who understands all the transaction rules and regulations beyond the generalities of business law.
- Adding a trusted M&A advisor, like Sikich, for financial and information technology due diligence, QofE reporting, tax consulting and more is an investment that pays for itself many times over. We’ve crunched the numbers: teaming with Sikich typically results in nine times the ROI in terms of cash in a seller’s pocket.
LEAN ON US
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:
