I have to admit that I spend an abnormal amount of time thinking about M&A transactions. I obsess over different deal structures for my clients. I wake up in the middle of the night with epiphanies on how to attract more qualified prospective buyers. I actively seek out conversations from others that can debate the finer points of how to effectively execute the sale of a business.
I have turned into a complete deal junkie, stressing most of my personal relationships to pursue excellence in this discipline, so believe me when I say that I take this stuff very seriously. As an investment banker, I believe my main objectives are maximizing purchase price and negotiating the best terms for my clients.
Main Drivers of Business Value
Based on 15 years of observation, my conclusion is that maximizing value simply comes down to three basic tasks:
Increase Cash flow — From a purely theoretical perspective, a company’s value is the sum of the present value of all future cash flows. Therefore, a company that has the ability to generate significant and consistent cash flows will command a higher value.
Decrease Risk — There is an inverse relationship between risk and value. An entrepreneur’s intuition will tell them that if there are two companies with exactly the same cash flow, the one with the least risk is more valuable. If all efforts are driven to reduce the risk of the business, inversely the value of the business will increase as will the attractiveness to potential buyer.
Effectively Execute the Sale Process — Marketplace dynamics must not be overlooked as a significant driver in maximizing value. Timing the market when multiple acquirers, availability of capital and the economic environment are at optimal levels will all positively impact the value of a business. Flawless execution of a sale process will also contribute to the highest purchase price and best terms.
Needless to say, these three tasks are much easier said than done. In my opinion, the management team of any business must be intimately involved in increasing cash flow and decreasing risk. Beware of any advisor who says he or she can magically help increase the value of your business. Some can help identify areas for improvement, but for a business owner to think these activities can be outsourced is foolish. Anyone that really has the skill to increase business value is usually doing it for themselves rather than advising others on the process.
Effectively Execute the Sale Process
Please ignore my obvious bias when I say that the sale process is one activity that should be placed in the hands of a professional. The sale of a business is a one-time event and great M&A advisors have honed their craft over multiple transactions to be able to deliver the best result.
I have given a tremendous amount of thought to the exact activities that should be employed in the sale process before even hitting the market. Here is a summary of the steps I employ to deliver the highest level of service to my clients.
The Preparation Phase — This phase is necessary to maximize value, create alignment between all stakeholders (including my firm) and develop a strategy that results in the most effective transaction. The preparation phase will increase the certainty of closing and the overall ease of transaction. Activities during this phase include:
- work with management to determine the most appropriate timing for an exit. Timing will take into consideration economic, M&A, corporate and personal factors. Once the date is determined, all other activities will be scheduled accordingly;
- review the objectives, constraints and concerns of the company shareholders;
- prepare a preliminary assessment of the minimum purchase price that the company could expect from sale of the business based on past and projected financial performance, comparable trading values and underlying financial and economic factors;
- develop an analysis of potential transaction alternatives and determine the issues and opportunities with respect to each alternative;
- summarize the most likely transaction structure and terms to be obtained from prospective buyers;
- work with management to obtain, assemble and organize all of the necessary information required to sell the business—including financial, operational and other such information expected to be required for review by a purchaser;
- perform vendor due diligence of the company to identify issues that a potential purchaser would identify in its review of the company;
- work with a tax advisor to conduct detailed pre-transaction tax planning as is required based on the strategy undertaken;
- coordinate the engagement of necessary reports from third parties, such as equipment and real estate appraisals;
- provide an introduction to a wealth advisor to determine post-exit strategies for wealth management;
- coordinate with selected legal counsel to determine negotiating strategies, identify non-negotiable issues and create alignment on overall transactional objectives;
- prepare a confidential information memorandum that provides a description of the business, industry, strategies, financial performance and other information determined necessary for a purchaser;
- prepare a comprehensive financial forecast that provides projections of the income statement, balance sheet, cash flow and working capital;
- discuss with various financial institutions the debt capacity of the business and terms available for staple financing options;
- prepare a comprehensive list of approved prospective purchasers that have the interest and financial wherewithal to complete a transaction on acceptable terms; and
- perform preliminary outreach, on a confidential and no-names basis, to prospective purchasers to gather interest, capacity and available resource to complete a transaction.
A Note on Timing
The most appropriate timing for a transaction is when one’s personal situation, the economy and the operations of the business are all in sync. Step one above is to estimate when the optimal timing might occur to take advantage of a preferable M&A environment or economic cycle. Once this is determined, our team can work backwards to determine how much time is available to align personal and operational affairs. The more time that is available to execute the selected exit strategy, the more lucrative the outcome. Planning three to five years before actually performing an exit is the best timeline—unfortunately this rarely happens.
A systematic approach to selling your business is always going to be your best bet when entering the market. As with many of your other important business decisions, it is imperative that you seek help from the right sources. As an investment banker, I can tell you that those businesses who seek out the assistance of an experienced M&A advisor invariably have a better result when it comes time to close than those who decided to go at it alone. You may be the best person to run your business, but you are not the best person to sell it—pick someone who has mastered the craft to advise you on how to best position your company for sale.