The U.S. just experienced the most active first half of a year in over a decade for middle-market M&A transactions, with 5,260 deals completed. As more and more companies realize the potential value of mergers and acquisitions, the number will likely only continue to climb. However, as the high number of failed M&A deals in 2016 showed us, not everyone is adhering to the best practices that can make or break a deal.
In our experience at Symmetrical Investments, one of the primary aspects of the M&A process that impedes success is integration – partly because integration is not a “one-and-done” step. There are three major phases to a proper integration plan.
1. Pre-offer analysis
2. Setting the course
3. Post-merger announcement and the first 100-days
Read on to better understand each phase, and how an M&A advisor can help you facilitate a successful deal.
Pre-Offer Integration Analysis
Many companies are now focusing on integration much earlier in the M&A process than in previous years, and that’s a good thing. In fact, you should start laying the groundwork for the integration process long before a deal is ever announced.
The first step you should take after selecting a potential acquisition is to form an integration team of decision makers who will be highly involved in the entire acquisition process. Their job will be to analyze potential acquisitions and make recommendations about how to proceed, starting with a strategic and cultural compatibility analysis.
Strategic compatibility refers to the level at which the two involved companies have similar management structure, administrative processes, resource usage/leverage, customer base, and financial management systems. Cultural compatibility refers to the level at which the two involved companies have similar management styles, values, demographics, geography, and overall attitude.
With an understanding of the synergies between the companies, you can then decide on the level of change needed and speed. Consider the backlash that may be caused by both. There may be employee resistance to a large degree of change or a lack of attention to detail if it is done too quickly. When deciding how to move forward, focus on a formula that minimizes the redundancies between the two organizations, keeps a steady momentum of positive change, and reduces uncertainty among all stakeholders.
Setting the Course
By the time you’ve completed the initial analysis, you should be working with your M&A advisor on preparing an offer, and should take additional steps to prepare for the anticipated transaction.
First, set the course by communicating with your stakeholders and make them feel involved in and assured by the process. Get buy-in among your leadership, so that they can prepare to align with the potential acquisition from the top. Engage your employees to make sure they are ready for the potential changes that lie ahead.
Second, start to create detailed planning documents. Your integration team, including your M&A advisor, needs to formulate your day-one post-merger plan and your first 100-days post-merger integration plan. These plans will serve as a roadmap for every aspect of integrating the two organizations, based on your initial compatibility analysis. Your team should also begin drafting a corporate policy integration plan to ensure that the new organization will have a pre-existing structure codified once it is formed.
Post-Merger Announcement and the First 100 Days
Now that you’ve made an objective analysis, started to draft integration plans, set the course from the top down, and communicated early, you should be preparing to sign the agreement and make the grand announcement. It’s time to execute.
Few days matter as much in the M&A process as day-one post-merger. You can set the tone for a successful merger across the board by starting out with a clear plan for how your company is going to look and act from the start. Corporate leadership should lean on the integration team and the roadmap they created in order to hit the ground running.
Finally, carry out your first 100 days plan, which your integration team created during the planning phase. The experienced team at Symmetrical works directly with the integration team and leadership to help keep the momentum going and ensure that you stay on course.
From day 101 and beyond, the integration should be a self-fulfilling prophecy. With a good plan, your new organization can become a shining example of corporate synergy, leveraging each company’s efficiencies.
If you’re considering a merger or acquisition, it’s in your best interest to get started as early as possible. Here at Symmetrical, we are committed to helping your company identify and secure the best deal it can and integrating as efficiently as possible. Contact us today to get started.
If you’re considering selling your business – and want the best offer – the time to start preparing is now. There is a lot of work that goes into a successful sale, and we can help.
This post will review the steps you should take to prepare your business for a sale, and our next post will review the steps you should take to actually promote and finalize a sale.
Step 1 – Know Your Financials
First, you need to understand the true range of value for your business. The market value of a small-to-mid-size business can actually vary greatly from the book or tax-mitigated value because these businesses are usually managed to minimize taxable income. While this benefits the current owner, the cash flow will look less appealing to a potential buyer, so you should perform a financial recast to calculate the true earnings.
We recommend recasting your business to EBITDA. This recasting process will provide buyers with an income amount more reflective of true earnings. The easiest way to think about the recasting process is to consider this as a way of demonstrating the financial results of the business “as if” it were owned by the buyer (taking into account tax-motivated or other discretionary transactions that reduce corporate earnings). For more on this process, see our blog post.
You will also want to understand your working capital situation. In the simplest terms, working capital can be defined as current assets minus current liabilities, but ultimately it is the amount of operating liquidity or cash available to a business at a given point in time. Working capital is an essential part of the day-to-day operations of a business and is just as important as employees and physical assets. For more on working capital, see our related blog post.
Step 2 – Know Your Strengths
Next, you’ll want to know your strengths. To a buyer, strengths include:
- Strong EBITDA margins
- A good multi-year EBITDA trend
- No customer or vendor concentration. Rather than having a large concentration of customers and vendors in one industry/area, a well-diversified set of customers and vendors means less risk for the next owner. A buyer wouldn’t want “all of his eggs in one basket,” so to speak.
- Just remember, “the lower the risk, the higher the valuation”
Step 3 – Know Your Weaknesses
After thinking through your strengths, think of the opposite. Anticipate which weaknesses a buyer or their advisor would bring up, and make any adjustments to mitigate these areas.
Ultimately you need to contemplate how you tell the story of your business and how you operate your business, which are critical considerations for a potential buyer.
Step 4 – Know Your Target Audience
Should you sell to someone within your family? How about a private equity firm? How do you choose? This, of course, can be stressful, especially if there is pressure to keep the company within your family. While the selling process differs with every company, the types of buyers present usually remain consistent, and there are pros and cons to each option.
To better understand the implications of who you should sell your business to, reference our blog post.
Step 5 – Know the Next Steps
Now that you understand the steps required to prepare your business for a sale, it is time to review the steps for actually going to market and selling your business.
Our next blog post will review the 10 steps to selling your business. We’ll review the due diligence process (it typically worse than you can imagine), the overall process (be prepared for the deal to “die” three times before it finally closes), and which marketing materials will show your business in the best light. Be sure to check back for that post in a couple of weeks!
Most business owners have had their fair share of practice in negotiation, between managing and finalizing contracts for vendors, clients, and even contractors and employees. But when it comes to negotiating the sale of your business, it’s best to take a step back and consider where you may need to brush up on your skills.
In every sale, there are two main parties: the seller (business owner) and the buyer. Unsurprisingly, these two sides have very different goals in regards to the sale, with the purchaser seeking to acquire the company at a low price with favorable buyer terms, and the owner wishing to maximize the buyout price with favorable seller terms. But at the end of the day both the buyer and the seller want a deal to be made – and that’s where negotiation matters.
Before signing off on a sale, here’s what you should consider to leverage the best terms.
Research, Research, Research
Do your homework –before a deal is on the table. Industry multiples of EBITDA, balance sheets, working capital and negotiation counterparts are all important aspects to review and understand. The more prepared you are walking into the negotiation, the higher the chances you will have of coming out on top.
Understand the Other Party
You also need to be familiar with the buyer’s interests. Educate yourself on both the negotiator and the company they represent in order to increase your bargaining power. Are they a strategic acquirer with synergies to realize or are they a financial buyer solely using your business as a platform?
Timing is Key
In some cases, business owners need to sell their company as quickly as possible. A distressed sale like this can lead to increased expenses and liabilities, as well as a lower market value. If you have a say in choosing the time of your sale, make the most of it. Plan ahead and list your business when your business and the market are both the strongest. Let’s be honest, most buyers will not accept the fact that a 70+ year old owner is looking for the right private equity group to do a majority recapitalization with because they want to stay on for another decade…
Price is Not Everything
While price is a key aspect in negotiating a sale, it is far from the only consideration. Terms within the agreement hold just as much importance. Both the seller and buyer should discuss these matters in order to keep the sale moving forward.
Know Your Walk-Away Number
While the end goal of the negotiation process is to make a sale, this isn’t always the right move for your business. Although walking away empty-handed may seem like the last thing you want, in some cases it is necessary. If anything, having a “walk-away” number can help you as a seller say no to an uncomfortable deal.
While all of these are important factors to consider, there are others that may be relevant given your situation. Our team at Symmetrical can ease your uncertainties and provide insight into the negotiation processes. Contact us to learn more.