Take Aways from Anatomy of a Deal: Mergers and Acquisitions for the Family Business

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:

1. Sellers must understand what they need financially from an after-tax standpoint.
2. 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.
3. Focus on the concentrations (i.e. industry, customer, and geography) and how to minimize them.
4. If there’s a customer issue or significant risk, raise it early.
5. Invest in the quality of the financials.
6. Family businesses can often be more flexible with structure so keep this in mind during the negotiation.

• Advice for buyers:

1. Develop the “why” for doing an acquisition:
   a. Diversification of risk (business and family)
   b. Supplement organic growth (acquire outsourced R&D or capabilities).
2. Family businesses can be risk averse and there should be significant support.
3. Educate the family on the impact of acquisitions (i.e. how it will impact cash flow).
4. First develop both organic and acquisition growth plans.
5. Develop a process to evaluate opportunities so there’s consistency.
6. 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?
7. Evaluate the quality of earnings (have your CPA review them). Use this review with the lender in the financing process.
8. The existing business must be doing well because acquisitions are very time intensive.
9. Start small with acquisitions.
10. Have one reason to buy. It brings focus.
11. If possible, avoid acquiring part of a company.
12. 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).
13. It is critical to understand the culture (communication, who is in control, resistance to change).
14. Be honest about the existing business’ strengths and weaknesses (check with key functions in the company).
15. Involve key functional stakeholders in the evaluation, underworld, diligence, and integrating.
16. There needs to be a champion at the executive level.
17. Develop a team for the transaction.
18. Evaluate whether to keep the brand or not. The buyer could add the seller’s name and then get rid of it later.
19. Focusing on the implementation is critical and that may offset a higher cost.
20. Consider having someone who is not part of the negotiations to seek advice from if things become difficult.
21. Look at risk and options to lessen through seller note or earn out.
22. 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.
23. For “rollover equity” and earn outs to be effective, there must be a high level of trust between the parties.
24. Considering buying in a minority stake to find out if the relationship works and have a call option at a higher price.
25. Be prepared because things will go wrong.
26. Stay flexible.
27. Step back from an emotional issue and ask why it is. Ask if there’s a different solution.
28. Doing transactions well will create a good reputation and other sellers in the industry may be willing to sell to you.

Haans Mulder, JD, MBA, MST, CFP^®
321 Settlers Road
Holland, MI 49423
616.392.1821
phmulder@cunninghamdalman.com