“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, truer words were never spoken. 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 get ready and get the highest returns for your effort.
Gauge the market
Knowing when to make a move is paramount. The transaction market is red hot right now. Readers of political tea leaves will tell you the odds that capital gains taxes will go up is far likelier than the prospect of their declining. 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 (PE) space is flush with cash. Lots of these players are working on closing out funds and starting new ones. Right now, there’s $1.5 trillion in dry powder that needs to be transitioned. If you’re a business owner, your phone may be ringing any minute.
Understand what’s included
Positioning for success means getting absolute clarity around two critical factors for the target company: customers and the supply chain.
Buyers need confidence that customers come along with the sale and that all contracts convey—especially the marquee accounts. They also need to understand the sourcing arrangements. Do vendors come with the deal? Are the existing contracts clear? Any special pricing or handshake agreements to uncover?
When it works in their favor, sellers should emphasize this type of information as a lucrative benefit for potential buyers.
Be ready to move
Time kills all deals. If you were making a graph, you’d see a clear correlation between the time required for negotiations and the likelihood of failure.
Both sides 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 money
Financial due diligence is a given. Information technology and security due diligence deserve equal attention.
Recently, the Sikich team has seen deals nearly fall through because buyers, along with R&W insurance carriers, had a great deal of concern 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 issues 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
If you take away one point from this article, make it this: teamwork makes the dream work.
For buyers and sellers alike, 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 consummate the transaction:
- Investment bankers on the buyer team function like a residential realtor. They learn what you’re looking for and bring 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.
- Buyers and sellers both 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 run the numbers: Teaming with Sikich typically results in nine times the ROI in terms of cash in the seller’s pocket.
Start with Sikich
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 resource 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 do or 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.