Transaction Advisory Insights:
tips for dealmaking
Did someone say free insights? Our Tips for Dealmaking page is updated frequently with tangible dealmaking tips on everything from pre-close to post-close and beyond. Bookmark this page now. Thank us later!
BUYING AND SELLING
If we’ve said it once, we’ve said it a hundred times – sell when you don’t have to. Equally as important – know your options. Whether that be a full sale of the business to a strategic buyer or private equity group or a partial sale to family members or management, do your research to determine what path is best for you. In fact, early conversations can save big dollars as a seller. Unfortunately, there isn’t a crystal ball that will tell you what your best option will be. Fortunately, the next best thing is to work with a trusted advisor to explore your possibilities. Contact our transaction advisors to explore your options today.
For business owners, selling their ‘baby’ is a very delicate matter. This puts potential buyers in precarious situations…If you’re in the middle of the deal and are seeing the following, it could be a sign that the seller just isn’t ready.
- Seller is dragging their feet on getting information over. Is it pulling teeth to get information from the seller? Do you have hesitations that you won’t receive all the necessary information to take them to market? Listen to your gut. These might be signs of a deeper issue of not being ready to sell.
- Transition plan. Does the seller have a transition plan in hand? Has this plan been communicated with all parties involved? If you have not seen or heard about the transition plan, this may also be a sign the seller has not gone through all the steps involved with selling.
- Something to look forward to. Does the seller have something they are looking forward to after they sell their business, like taking on a new business or retirement? Do they have something to occupy their days? Knowing what they are leaving for rather than what they are leaving behind will help move the deal forward.
Employee turnover and disengagement can ruin your bottom line post-acquisition. Quickly integrating what employees do and how they do it and ensuring they are engaged and productive post-acquisition will help you realize the return on your investment sooner. Failure to focus on this can negatively impact your bottom line. Don’t say we didn’t warn you!
The hunt for a good deal is tantalizing. The financial numbers on paper may look fine, but there may be hidden obstacles lying within the operations. How do you determine whether those are things that can be improved upon or are ultimately dealbreakers? By performing an operational efficiency assessment of a target company before signing the dotted line, you can glean future profitability metrics, determine what the internal obstacles are and decide whether the cost of improvement is too great. When the red flags become excessive, know when to walk away.
DEAL COMMUNICATIONS
There is no one involved in M&A who wants to see a deal killed because a serious issue was not voiced sooner. Foster an environment of communication to get the deal over the finish line. Is information unavailable or will it take a while to gather? Let the teams know. Curious if there is perhaps a work around? Ask your advisors! Is a request or process unclear? Clarify with the person asking! Found a problem that might derail the entire deal? Chat about it. Everyone involved in the transaction has the same goals in mind. Get there sooner and with a result all involved will be happy about through effective communication.
Remember our suggestion about fostering an environment of open communication? What better way to do that than by hosting weekly meetings with your advisors? This provides a great opportunity to discuss progress, questions and concerns. You may also want to invite financial, legal or technology advisors to the party to impart transparency across teams. Not to mention save time by maximizing efficiencies when working towards your deadline. In our experience, these meetings identify any major concerns early in the process as opposed to uncovering a major issue right before deal close. Schedule those weekly meetings now and thank us later.
Avoid the usual fire drill by setting and communicating realistic timelines from the word ‘go.’ You’re not alone when dealing with capacity issues, so make effective use of everyone’s time by working smarter, not harder when communicating realistic timelines.
Get those meetings and deadlines for documentation fulfillment on calendars! Communicate when you are aiming to close the deal and back into your deadlines from there. Deals generally take a while to close, and you want to give the teams enough time to know the ins and outs of the business and the transaction.
Have honest conversations around the realistic amount of time certain tasks will take, especially when relying on others for information. Due diligence is serious business and should not be rushed. When you need a helping hand, Sikich’s transaction advisors are ready to jump in.
The Financials
There is no way to sugar coat this one: messy accounting is a huge deal killer. From personal expenses on the company card to expenses not in accordance with GAAP, we’ve seen it all. And we know all too well that this is where deals get held up.
This should go without saying, but before you even consider a deal, go through your books, clean them up and understand all expenses before approaching the deal table. If you’re following this golden rule, any game of “Deal or No Deal” you play in the M&A world will be that much closer to “Deal.”
If you believe your books are messy beyond repair, our skilled accounting advisors can take the cleanup off your hands. You can thank us later (and contact us any time, of course).
Our accounting textbooks say that working capital is equal to current assets minus current liabilities. Or, basically, how much the company needs to have on hand to cover the day-to-day expenses. In middle market transactions, buyers expect enough working capital to support operations of the business post-closing.
When sellers normalize working capital cycles prior to a sale, they are showing the new norm is sustainable. On the flip side, when buyers see more normalized working capital, risk associated with negotiating working capital targets is often reduced.
When approaching the negotiation table, here are a few working capital considerations to understand:
- Expenses: Many expenses will disappear when you synergize with your new acquisition. Plan ahead for these changes and anticipate what you will need come day one, the end of the first month and even after six months.
- Personnel: Will you need to hire a more sophisticated CFO to help integrate the finances? Will you need to bring on more salespeople to keep the momentum going? It’s important to consider how to working capital will change with regards to personnel before signing the deal.
- Long-Term Plans: What are the company’s goals for the future state of their working capital? Do they scream, “Here’s why PE should invest in me”?
- Balance Sheet: Take a look at the accounts receivable and inventory turnover on the balance sheet. If accounts receivable takes a while to turn, and conversely, if the inventory is turning quickly, the “liquidity” of your working capital may not be what you hoped it was. Don’t forget about the accounts payable or potential missing accrued expenses, too.
Need more color on any of these? Reach out to your favorite Sikich transaction advisors today.
They say that success comes from what is done consistently. The same holds true when it comes to how our transaction advisory team looks at deals. Or should we say, lack of consistency? When we see a lack of consistent margins, that’s when we have to start digging and asking the tough questions. The ones that make buyers a bit queasy, like: What’s going on here? Are there revenue recognition issues? How is the WIP being applied? Has there been a change in the accounting method?
To gear up for a successful transaction, take a look at your gross or contribution margins for consistency. If this sounds like a heavy lift, your favorite transaction advisors are here to help.
As with most tax topics, this one is a bit technical. So, this one is for owners of C-corporations. If you are the owner of a C-corporation and the stock qualifies as Section 1202, Qualified Small Business Stock, you could be eligible for a 100% gain exclusion when you sell the stock.
Not sure if your stock qualifies? Loop in Sikich’s transaction advisors and we can help you make the determination.
EVERYTHING ELSE YOU SHOULD BE THINKING ABOUT
We’ll say it loud for the people in back – no one in M&A is trying to kill a deal or get you with a “gotcha” moment! As experienced M&A professionals, it is our duty to ask tough questions and pull any skeletons out of the closet before it becomes the 12-foot skeleton outside of your house for Halloween. Invite the skeletons to the transaction table, dust off the cobwebs and work with your transaction advisors to mitigate any negative impacts. Together you can create a plan to address the skeletons (and we don’t mean giving it a funny nickname).
When selling is on the table, most business owners file those conversations away as Classified. However, we are here to say, assemble your deal team as soon as a decision has been made. Some key squad members include your CFO/Controller, COO and Head of Sales. The other half of your dream team – the investment bank, QofE providers and potential buyers – will require a load of information to begin the process. Outside of their regularly scheduled programming, your team will also be asked to provide hundreds of files and documentation crucial to the business. Remove the Classified stamp from your selling plans and make sure your team is prepared for what’s ahead.
You’ve locked your sights on a potential acquisition. It operates in an interesting industry, its revenue meets your criteria, and it seems like a match made in heaven. You start to dig in and realize it has a high customer concentration. In fact, 10% or more of revenue from a single customer gives us transaction advisors pause. What next? Do your due diligence and talk to the customers to uncover what it is.
- Why does this one customer generate more than 10% of revenue?
- Is it due to a relationship with the owner? Will they remain a customer if ownership changes?
- Is it due to a relationship with a sales representative? Do you need to lock in that rockstar sales rep as part of the deal?
Generally, low customer concentration will create fewer issues in the long run. However, uncovering these answers will help structure the deal for success. Our team of transaction advisors stand ready to help you dig into the deal and ask these questions.
The last thing you want to acquire is someone else’s data breach. As an M&A professional, you probably aren’t an expert on cybersecurity. Luckily, we know a few. Here are some tips to consider when acquiring:
- Multifactor Authentication – The 80/20 rule: 80% or more of breaches could have been avoided if multifactor authentication was enabled, yet only 20% of organizations have multifactor authentication properly enabled. Enable it; don’t be the 20%.
- Incident Response Documentation: The worst way to find out if your incident response plan is a good one is being forced to use it…with a real incident. Strategize your plan. Think through all scenarios. Then, test it before an incident occurs.
- Protect Sensitive or Regulated Data: Does the target company have sensitive or regulated data that must comply with protection standards such as PII, PCI, PHI, CUI, ITAR, etc.? Non-compliant environments can drastically change deal value if remediations are needed to bring an environment into compliance.
- Penetration Testing: When was the last time a penetration test was completed? If the answer is “I don’t know”, it’s probably time for one. In fact, if it hasn’t been performed in the last year, it’s not meeting industry best practices and is likely a hacker’s daydream.
- 24/7 Managed Security Service Provider: Most security events happen on nights and weekends when the bad guys know you’re less vigilant. Consider a 24/7 managed security service provider that can always watch your back. Like your own, personal cybersecurity superheroes.
When making acquisitions, avoid unexpected costs, legal headaches and brand reputation nightmares when you work with Sikich’s dedicated IT experts. We’ll help you keep your portfolio companies secure and operating at peak performance. Contact us today to learn more.
One cost-saving strategy post-acquisition is to integrate technology and decrease technical spending. From duplicate implementation and ongoing costs to tech support resources, there are many ways to reduce technology spend.
Start the road to technology savings from day one. Grab that big piece of the integration pie with assistance from our team before those costs eat your bottom line.
From turnover to decreased productivity, people issues can significantly cut into profitability. To employees, a merger or acquisition is not just a corporate strategy – it can be a disruptive and traumatic event that generates feelings of uncertainty, chaos, stress and lack of productivity. The human element can often be overlooked when making major business decisions, and that’s where change management comes in.
Help ease the transition through change and bring your most important asset up to full productivity faster with support from Sikich’s human capital management experts. Contact us today to learn more.
