Exit Planning Top 5 ‘Must-haves’ for a successful M&A Transaction
If you are an owner-manager, it is likely that selling your business is the culmination of a lifetime’s work – a once-in-a-lifetime transaction. Your prevailing buyer pool is likely to be highly professional, experienced in M&A and consisting of large conglomerates with specialist departments or private equity purchasers. An acquisitive conglomerate or private equity fund would typically screen literally hundreds of opportunities annually. So, they will expect you to be well-prepared, the business structured for a sale, and shareholders ready to execute a transaction with very clear objectives, parameters and defined strategic plans for the business post sale or merger.In our experience, there are some key “must haves” in order to not only generate buyer interest, but to give yourself the best chance of actually successfully completing the transaction intended.
Strong Financial Systems and Timely audited reports
Timely and up-to date accounting and controls will significantly ease the burden of the often detailed due diligence process that can ensue. In addition to inspiring confidence to a buyer about the management and operations of the business, it spares months of data collection and information gathering on the seller’s part, which often means taking their “eye off the ball” and the decline of day-to-day operating performance. More importantly, a typical acquisitive company looks at several potential acquisitions a year, and quite often many at the same time, so this aspect is imperative, to avoid “deal fatigue”.
Keeping Personal and Business Dealings Separate
Having founded and guided an organisation from its very conception to a flourishing and thriving business, many owner-managers view the business as an extension of themselves. Many owner-managers may therefore find it difficult to separate personal and business dealings often leading to complex carve out structures of personal versus business assets, unnecessary operating dependencies and related party transactions. This is bothersome to a buyer – why? Because they cannot accurately ascertain if the business performs the same without these dependencies and it is difficult for them define to what extent. This adds a level of risk perception which then reduces the potential price or value.
Key Man Risk
This comes to the heart of the “succession planning” issue. Grooming a second--tier management team that are competent, well-motivated and have the authority and skills to lead the business post sale is critical to capturing the ongoing operating sustainability of the business – which, in short, is how the business is valued, i.e. on its sustainable future earnings, and not on the past results of perhaps one key person, who is likely to transition out of the business post sale.In parallel with this, the business would be expected to have documented methodologies, decision making processes, operating procedures, manuals and ancillary policies. We often ask the question that if the owner-manager takes a 12-month vacation without being able to be contacted, will the business continue to function and show similar operating results for that year? If the answer is “Yes” you’re in good shape. If the answer is “No” then you have work to do prior to considering a sale.
Revenue Diversification
If your business is dependent on a handful of clients, projects, a particular supplier, or a particular personal or business relationship, this increases the level of risk of the future operating earnings sustainability and hence negatively impacts value. If you have diverse sources of revenue this will ensure there is less risk, and underpin the value of the business.
“Focused Growth” versus “Just Growth”
A typical mid-sized owner-managed business’ core appeal to a potential buyer is its fundamental specialty and niche market. Growth in that focused market through customer revenues and operating earnings is what a buyer is looking for. Revenue streams outside of this core focus, may be viewed as a distraction and non-repeatable and usually taken at a discount or ignored. For example, one-off projects or gains from non-core trading activity. However, this is distinctly different from diversification of revenue streams mentioned above, that are within the business specialty (rather than without). For example, a healthcare business that generates diverse revenue from different medical specialties will be sold at a premium to a healthcare business that also generates part of its financial metrics from café’s and gyms for example.