So, it’s time to sell the company. Selling a business is a job in itself, and preparation is crucial. Completing any form of merger or acquisition transaction is like running a marathon. If “the unexpected” delays the event, you can always resume your training, but if you don’t start training now your performance will suffer.
Sellers entering their first M&A deal should take extra time to educate themselves. Attaining familiarity with the norms of these transactions will mitigate the risk of making a bad deal or harming a good one. It will allow a business principal to speak up when the need arises, and know when to get out of the way and trust their professionals and advisors.
A seller should know the current market conditions. In 2015, the number of private company M&A transactions was up 5.5% from the prior year. High stock market prices, low interest rates, better employment figures, strong balance sheets and “dry powder” ($1.0 trillion of cash held by S&P 500 companies and $1.34 trillion held by private equity firms) are responsible for this uptick.
So far in 2016, several high profile public-public mergers have come unglued. In 2016, most professionals expect private company M&A activity to be lower than 2015, in both deal count and valuations.
Sellers should have a thorough understanding of valuation issues and develop realistic expectations. This helps them to push the purchase price in the right direction before the deal is negotiated, and to know when they have a good offer.
In addition to having realistic expectations, sellers should be able to tell a simple story which justifies their valuation. Before getting deep into details, explain revenues in terms of the number of widgets sold and the price per widgets. Explain the factors influencing the future of both variables. Tell the story, instead of spinning it.
Sellers should have credible support for their financial projections and any underlying assumptions. Understand income statement adjustments, particularly add-backs, and study any pro forma financial statements. Know that acquiring companies seek synergies between the two businesses in order to justify a price.
Valuation multiples will reflect the quality of earnings, particularly revenue growth and EBITDA margins. Tax considerations and costs of integration will have a measurable impact on the deal.
Sellers should obtain a professional valuation of the company. This will help in negotiations, fulfill fiduciary duties and protect management from claims by shareholders. Valuations are usually based upon a comparison of several of the following methods: comparison with comparable (publicly traded) companies, similar private company M&A transactions, discounted future cash flows and a leveraged buyout analysis.
If the current valuation is lower than one used in a venture capital round, VC shareholders will not want to sell.
Envision the ideal buyers and the ones to avoid. Be wary of acquirer companies with investors who also own large stakes in your competitors.
A seller should determine the appropriate sales process based upon expected timing, management resources, the number and nature of potential buyers and the desired level of confidentiality. A negotiated sale typically involves one to three potential buyers; a targeted high-level solicitation typically involves three to ten potential buyers; a targeted auction: 10 to 20 buyers; and a broad auction: 30 or more buyers. More buyers cause a longer process and less confidentiality.
Even a seller who expects to conduct a broad auction should categorize the suitability of buyers. Potential buyers should be approached in tiers, starting with the buyers who are most likely to say “no.” It is crucial to screen out unqualified buyers to make better use of the seller’s resources and protect confidential information.
In the next article, I’ll review a typical M&A timeline and some of the fundamental deal terms which the parties will negotiate.