Serious About Selling? Prepare to Prepare.
Until the beginning of 2022, the pace of merger and acquisition transactions was still at or near record high levels. But the party seems to be winding down. In Q3 2022, Pitchbook estimates that there were approximately 6,400 global M&A transactions – down almost 32% from the same period in 2021. This comes after a decline of over 14% in total deals in Q2 (all figures see Note 1, below).
There are a lot of factors that are driving this decrease in activity, but to focus in on just a couple:
valuations are under pressure
the cost of capital is rising
the economic backdrop is full of fear, uncertainty and doubt regarding inflation, global recession, and lingering effects of the pandemic.
The market backdrop may be more challenging for sellers than it was a year ago - but deals ARE still getting done. The key thing to bear in mind is that buyers are moving somewhat more cautiously in this environment, they are taking longer to complete due diligence, they are scrutinizing elements of their targets more closely than perhaps they would have if the market were more competitive. They are asking more questions, more detailed questions, and analyzing the risk of deals while keeping an eye on the market.
If you’re a seller in this current market – or thinking about selling in the near to mid-term – what can you do to maximize the likelihood of a successful deal? One where you achieve the best outcome possible despite market headwinds?
The short answer - over-prepare and do it proactively. Show buyers that you’re serious about selling by preparing and organizing your books and records in advance, so that when the buyer starts due diligence, they can move quickly and decisively. Anticipate their questions and have the answers at your fingertips.
Transactions take time, and a lot can change during the transaction process. A lot can change for the buyer, for your business, or for the market in general - or any combination of the three. Often the transaction process itself can last 6 months or longer. In the six months from April through September of 2022, the Fed raised interest rates 5 times, a total of 2.75% - a significant increase in the cost of debt capital that could impact buyers, sellers or both. And it is not uncommon for a buyer to walk away from a transaction because something changed while you were working in good faith towards a deal. By taking a proactive approach, you can shorten the timeline AND increase the odds of a successful deal, in some cases quite significantly, by preparing in advance for due diligence.
Assume a buyer could come knocking unexpectedly and prepare your company information so that you are ready to capitalize on an unexpected or unsolicited outreach. Think about it this way - if a buyer is looking for a business to acquire and can pursue your business or a competitor’s, if all else is equal, the buyer will generally favor the business that has thorough, organized books and records, a detailed business model, comprehensive, clear financial information, and is ready to answer the critical questions with analyses and data. This makes it easy for a buyer - and the capital providers - to evaluate your business and move quickly.
As a seller, now is the time to overprepare. Expect buyers to take more time and effort in due diligence. Assume they will focus intensely on the assumptions and estimates underlying your financial projections. Know that they are going to want to examine every aspect of your business – commercial, operational, financial, and legal. Anticipate this and review your books, records and most importantly, your financial forecasts, in great detail. Get ahead of the questions and shift your posture from defending your business to emphasizing its successes.
Bonus Tracks: Where to expect buyers or investors to focus
Far from an exhaustive list, but expect questions to probe far beyond examining top-level trends and data. Expect buyers to want to understand “why” – and “why it can/cannot be done.” A few examples:
Financial model. What are the key assumptions driving the financial model? How do your growth rate assumptions compare to the market growth historically and projected? What will it take for you to achieve the growth you’re forecasting? Do your margin assumptions support the investment needed to grow at this rate? Do they reflect current labor market conditions or supply chain dynamics? What could competitors do to disrupt your plans?
Customers. How well do you know your customers and why they buy from you? What is the cost of customer acquisition, what is the expected lifetime value of a customer? How long does a typical customer relationship last? What makes a customer remain with your business longer than average? What is the nature of the customer relationship (transactional, recurring, re-occurring, e.g.)?
Balance Sheet. What reserves have you put in place against assets and liabilities? What are your off-balance sheet liabilities or contingent risks that a buyer will find? How are you managing these risks?
Legal. What is the history of litigation, for and against your company? What HR issues does the company face? What environmental concerns will a buyer need to analyze?
At Amplify Consulting Services, we are here to help you think about your transaction – our objective is to ensure you’re prepared when it’s time. If you’re considering your future plans for your company, let us help you work through it.
We offer hands-on transaction support throughout the planning, prep and process, and will roll up our sleeves to work with you at every step, in addition to coaching through webinars and seminars. Reach out and let’s discuss your objectives and how we can help you achieve them. Visit our website at www.amplify-cs.com or get the conversation started by reaching out at info@amplify-cs.com
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Sources:
1). Pitchbook, “Q3 2022 Global M&A Report”, as published at https://pitchbook.com/news/reports