M&A: Want to Sell or Merge?
In a recent blog we updated the changing M&A landscape for 2020. We also noted that respondents to CSA Research’s annual Global Market Study (GMS) have shown consistent interest over the years in buying, selling, or merging in response to the question, “How important will the following actions related to merger and acquisitions be in 2020?” Of the 356 respondents from the representative sample of 462, 29% said they wanted to sell, 34% would like to buy, and 30% preferred a merger.
Did COVID-19 affect the results? We analyzed responses by survey month (January through March and April through July) and combined the sell-buy-merge responses into a single group so that we could identify changes in the balance of opinion. Through March, 26% of respondents said they were ready for one of those three M&A actions. Three months later, that number had grown by 11 percentage points to 37%. Based on follow-up conversations, we would say that COVID-19 caused fear or accelerated retirement or lifestyle choices for some smaller LSPs.
That said, regardless of the times or economic climate, successful M&A for both sides requires forethought and execution. CSA Research advises companies that want to be acquired or merge to take a planned approach to selling as they make their case for why someone might want to buy them. On the flip side, we counsel LSPs that want to acquire others to incorporate acquisition into a well-thought out corporate strategy – we will discuss M&A buyer issues in an upcoming blog, “M&A: Want to Buy or Merge?” For today’s blog, let’s put aside the buyer requirements and focus on what prospective sellers must do.
The Process of Selling
With so much interest in buying and selling, why aren’t there many more transactions? It’s because many LSPs owners and executives who want to sell don’t progress much beyond wishing for some magical liquidity event. For those that do take action, we find that more than 70% of deals fail – for some very predictable reasons that we’ve identified in our research. In our report “The Owner’s Guide to Maximizing LSP Value,” we outline a comprehensive approach to selling a company. Here we summarize four basic steps from that research – they aren’t exhaustive or sequential but intersect at various points:
- Have a plan. The sale of your company will be a major event in your life and business – and for your employees. Discuss your intentions with trusted counsellors and business colleagues. Then document your plans and reasons for selling, identify the strengths and weaknesses of your company, decide if you want to stay on after the sale or leave, and sketch out a timeline. Assess your company’s readiness for this transition on all the business axes so that you can answer tough questions from sellers about “why should we buy your company?”
What to expect: If a potential seller doesn’t have a plan and can’t articulate a solid value proposition to a buyer, we send them back to the drawing board – either to further develop their strategy or to refocus their energy on fixing their business and readying it for sale before proceeding. Do not waste your time on M&A calls if you are not ready to sell.
- Find an expert trusted advisor. After the decision to sell your life’s work, hiring the right advisor is the second most important M&A choice you will make. Trusted M&A advisors bring clarity to the market landscape, provide access to the right buyers, and bridge the transaction experience gap between owners of smaller businesses selling themselves and the mid to large-sized companies buying them. The buyers may have a full-time M&A team, be advised by seasoned professional buyers, or be backed by investment bankers.
What to look for: Find a credible advisor capable of confidentially helping you identify, vet and select the best business and cultural fit for your company. For example, we use our database of “verified LSPs” to identify best fit and eliminate non-serious prospects by requiring an upfront M&A retainer which allows us to bring to the table only one to three ultra-vetted companies ready to do business.
- Quantify desired outcomes. Prior to starting the time-consuming process of selling your company, establish realistic expectations of your company’s value. Don’t expect to find much detail in the articles in business media or trade publications, at investment sites, or in the press releases announcing the deal. Transaction details are typically announced only for publicly traded companies for which there’s a legal or regulatory requirement to do so.
Where to find data: Your advisor can provide supporting information such as the average valuation multiples based on EBITDA and other criteria based on verified M&A data. More importantly, your advisor can help you get a higher valuation by identifying potential buyers who could benefit the most from your business.
- Get your business ready to sell. In their due diligence potential buyers will scrutinize every aspect of your business as they evaluate how it fits into their business strategy – for example, by adding or supplementing services, geographies, sales, or some other growth factor. Overlap and redundancy might work for or against you as the buyer identifies synergies such as cost avoidance, expense reduction and, cultural fit.
What to do: Readying a business for sale isn’t an overnight proposition. Be ready to provide information and data to satisfy the buyer’s due diligence. Work with your advisor to prepare yourself and your company, do whatever you can to maximize the value of the asset.
Think Hard – Then Do It Right
In the final analysis, getting the wire transfer into your bank account is the only success factor that matters – and we’ve seen deals fall apart as the seller was waiting for that deposit. If you have already made the decision to sell, make a commitment commensurate with the investment and risk levels associated with that strategy. Find a reliable and trusted advisor with a reliable methodology and vetting process that can help you get a fair valuation in full confidentiality.
If being acquired is not part of your long-term strategy, don’t give in to the fear that “everybody’s selling” and go further. It will de-focus you from your work, could put too much information out in the market about your business, lower future valuation, and run the risk of losing key employees and demotivating your team if the information gets out. And you can be sure that information does get out for smaller deals, so confidentiality and data integrity must be part of your M&A rationale.
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