How Important Is Timing in M&A?
The old adage that “you can’t time the market” is definitely true for most people. There is no way of knowing when we’ve reached the market peak, when the momentum will shift in the other direction, what catalyst is around the corner.
To be objective about it, when is the right time for a transaction heavily depends on your objectives. Business owners need to consider both their personal plans – including retirement, succession, new opportunities – as well as the broader market context, and the competitive environment as well.
It may not be possible to accurately predict market movements on a day-to-day basis, but a “big picture” view of M&A is important. The “big picture” can shape the timeline for a transaction when considered alongside your objectives. What’s the typical transaction timeline look like? How much planning and prep work goes into a transaction process? If I’m a seller, what does the buyer universe look like - how many companies should I market the business to? If I’m a buyer, who else is likely to be bidding, what other targets should I consider? What’s the market environment currently, and (gasp…) the political environment.
While some things change unpredictably, and many factors can’t be controlled, thinking about timing can reduce your exposure to some uncertainty.
For example, the tax reforms put in place by one administration may not survive in their original form in the next administration. When the situation is favorable, you may not want to miss the opportunity to benefit from the tax environment. But it’s hard to move from a standing start, which is why we recommend beginning preparation even before you’re ready to transact.
So if you’re thinking about treatment of gains and your personal tax impact, this context that might help you decide whether to start a process before changes take effect. As a buyer, it may help you negotiate more effectively too since you know the seller stands to keep more of the consideration before taxes rise.
It takes time to get a deal done. Understanding the elements that impact the timeline of a transaction can help business owners determine when is the best time to kick off a deal in order to meet their timing objectives.
How long does a typical transaction take, from launching a transaction to closing?
It can vary quite a bit, but a good rule of thumb is anywhere between 3 to 9 months, with 6 months being fairly typical
How much time should I spend preparing for a transaction before engaging advisors (lawyers, bankers, accountants)?
This really depends on your business, how organized your books and records are, how experienced your internal team is in working through M&A transactions. 6-9 months would not be uncommon. So now you’re in the 9-12+ range months between prep time and process timeline.
What macro factors do I know are at play? (Just a couple of many elements here…)
The interest rate environment – are rates climbing, steady, or falling? Are we at historic lows or highs today? When rates are climbing, the cost of capital is rising, making it more expensive to for buyers to make acquisitions – which typically will weigh on valuations, especially for financial buyers
The tax environment – will I keep more of the consideration paid if my sale closes this year? How confident am I on that?
The market backdrop – how many buyers are active in my market ? Are the buyers strategics (operating companies), financial buyers (Private Equity, e.g.), or a combination? Have there been a spate of recent deals, providing good valuation benchmarks? Is there a shift in the market that is likely to make my company more, or less, attractive to buyers in the coming 12-24 months? Is the credit environment favorable, making it more attractive for financial buyers to make strong bids?
An example:
If you knew you wanted to sell your business and retire by the time you turn 60 in January 2024, you will likely spend a good portion of 2023 executing a transaction to reach that goal. So you’re probably going to want to start your prep and planning work by mid-to-late 2022 to allow for any market hiccups. Remember, no one expected a COVID pandemic when they were making their plans for 2020 at the end of 2019.
It’s closer than you think. Starting to think about the future and doing some planning and prep work will also allow you to move quickly if a buyer unexpectedly knocks on the door with a compelling offer.
Bonus Tracks - Some common reasons for deals to get delayed:
Missing the numbers.
This happens all the time. A customer cancelling unexpectedly, a big contract falls through, the supply chain seizes up and expenses rise dramatically, unexpectedly. The best thing you can do to reduce the risk of a big miss is to be very realistic in forecasting. This does not mean overly conservative - the balance is to not leave money on the table just to limit the risk of a miss. Stress-test your forecasts, run scenarios, and stay in front of customers and prospects to increase your confidence, and the buyer’s.
Unexpected due diligence findings.
It’s on par with a good, detailed, thorough home inspection. Finding the M&A equivalent of bad plumbing is not uncommon, but it does cause buyers to take a deep breath and reassess the risk profile of the deal. What can you do? Perform due diligence on your own business - get out in front of the surprises.
Change in the buyer’s circumstances.
Unexpected things do happen. A competitor makes a move that changes the buyer’s priorities. The buyer’s internal deal sponsor leaves and the support for the transaction is diminished. Don’t stop executing and running the business while you work on the deal. Wait until the last check clears before you take your foot off the gas pedal.
Amplify Consulting Services LLC provides support to businesses in transactions and transitions. If you’re considering your future plans for your company, let us help you work through it. We offer coaching through webinars and seminars, hands-on transaction support throughout the planning, prep and process, and will roll up our sleeves to work with you at every step. Reach out and let’s discuss your objectives and let us help you achieve them. Get the conversation started by contacting us at info@amplify-cs.com