The following article was shared by Haans Mulder of Cunningham Dalman PC.
- Key components of a deal: strategic rationale, due diligence, deal structure (stock v. asset structure), accounting/tax, and integration of cultures.
- The time frame is typically 6-12 months once a buyer is found.
- Transactions of $50 MM or more have larger multiples. They have shared services and ERP systems that allow for greater scaling.
- Both sides need to have a “walk away” price.
- Advice for sellers:
- Sellers must understand what they need financially from an after-tax standpoint.
- Eliminate or “de-risk” upfront. In other words, identify issues as you are planning to sell and address them before putting the business on the market.
- Focus on the concentrations (i.e. industry, customer, and geography) and how to minimize them.
- If there’s a customer issue or significant risk, raise it early.
- Invest in the quality of the financials.
- Family businesses can often be more flexible with structure so keep this in mind during the negotiation.
- Advice for buyers:
- Develop the “why” for doing an acquisition:
a. Diversification of risk (business and family)
b. Supplement organic growth (acquire outsourced R&D or capabilities).
- Family businesses can be risk averse and there should be significant support.
- Educate the family on the impact of acquisitions (i.e. how it will impact cash flow).
- First develop both organic and acquisition growth plans.
- Develop a process to evaluate opportunities so there’s consistency.
- Example of a deal screen:
a. Is it worthwhile to buy or should you develop the business
b. What is the company’s competitive advantage and is it durable
c. Is the company and price financially attractive; and
d. Are the companies strategically aligned?
- Evaluate the quality of earnings (have your CPA review them). Use this review with the lender in the financing process.
- The existing business must be doing well because acquisitions are very time intensive.
- Start small with acquisitions.
- Have one reason to buy. It brings focus.
- If possible, avoid acquiring part of a company.
- Only pursue opportunities that fit very closely with the business (otherwise it won’t have the resources it needs and they take a long time).
- It is critical to understand the culture (communication, who is in control, resistance to change).
- Be honest about the existing business’ strengths and weaknesses (check with key functions in the company).
- Involve key functional stakeholders in the evaluation, underworld, diligence, and integrating.
- There needs to be a champion at the executive level.
- Develop a team for the transaction.
- Evaluate whether to keep the brand or not. The buyer could add the seller’s name and then get rid of it later.
- Focusing on the implementation is critical and that may offset a higher cost.
- Consider having someone who is not part of the negotiations to seek advice from if things become difficult.
- Look at risk and options to lessen through seller note or earn out.
- Consider “rollover equity” to avoid tax consequences and to have alignment with the seller. This is where the seller has equity in the buying company.
- For “rollover equity” and earn outs to be effective, there must be a high level of trust between the parties.
- Considering buying in a minority stake to find out if the relationship works and have a call option at a higher price.
- Be prepared because things will go wrong.
- Stay flexible.
- Step back from an emotional issue and ask why it is. Ask if there’s a different solution.
- Doing transactions well will create a good reputation and other sellers in the industry may be willing to sell to you.