Rethinking M&A

By Russ Warren, Managing Director
Business Development

I’ve been in the middle-market M&A business more than 40 years, and one thing is clear.   When you mention an M&A transaction, people talk first about numbers.  “What is the trailing 12 months’ EBITDA?”  “What is the Enterprise Value-to-EBITDA multiple?”  And so on.  Why is all the talk about numbers?  As the infamous bank robber Willie Sutton said, “because that’s where the money is.”  But the numbers are the result of the owner’s planning and execution.  Planning is where the leverage is.

In 2020, we at EdgePoint began to rethink how an owner needs to prepare for a successful transition of ownership.  Sometimes it is helpful to get beyond one’s usual perspective.  Consider the following puzzle: “What is the number of the parking space the CAR below occupies?”

|  16  |  06  |  68  |  88  | CAR  | 98  |

(Answer at the end of this article)

To obtain fresh first-hand information (beyond anecdotes), EdgePoint conducted an extensive survey of owners who had sold their middle market business, asking them what they did to address matters such as clarity of personal and business objectives, confidentiality of the selling process, communications with stakeholders and maximizing certainty of close.  We also asked them, looking back with the passage of time, what would they have done?

Using their responses and our experience as the foundation, we released our white paper, THE SELLER EXPERIENCE – PREPARING THE OWNER FOR TRANSITION, late last year.  Interest in this content led to multiple requests for presentations and panel discussions about owner preparation at seminars and M&A conferences.  We would like to share with you some of the highlights and fresh insights on our findings.

Articulate the Objectives for a Transaction

When a middle market business owner decides to sell, it is important to develop a clear statement of his or her financial and ‘beyond financial’ objectives for the transaction – both personal and business.  As one owner said: “Make sure you have your objectives clearly in mind, from most important to least important and stick to it.”

In our survey, responding owners told us their most important objectives were the following, but acknowledged those priorities changed with the passage of time:

• Best price and terms (waned after sale) – The best package of price and terms is individualistic. All cash?  Roll-over a portion and continue?  Earnout?  Take buyer’s stock?  Equally important, the buyer needs to convey a clear definition of its objectives for the transaction.   Only when buyer and seller objectives are compatible will the transaction be ‘fully successful’.   Think win-win.
• Protecting their employees (rose after sale) – Protecting employees, including family members in the business, means selecting the right buyer after feeling the ‘chemistry’ and getting to understand their plans for the business. Do they intend to move your operations into another facility?  Are they acquiring your business to fill their own talent needs?   Can key employees move up or count on more resources to execute a growth plan?
• Preserving their legacy in their circle of influence (rose slightly after sale) – Preserving a legacy means being confident that the buyer will treat management, employees, customer groups, suppliers and other stakeholders fairly and protect the company’s reputation and ‘brand’.

Owners also told us they had personal reasons to sell, such as health issues and other pursuits.  In subsequent dialogues, having a clear vision of life after closing was clearly important.  “Owners whose self-identity is their business are happier running to something than those who are running from something.”

Plan Effectively for the Sale

As acclaimed business author Jim Collins says, “All time is not equal.”  There are times on your business journey that require full attention and decisive action.  Contemplating the sale of your business is one of them.  A key takeaway from our survey was that, looking back, 76% of respondents said they needed one to three years to prepare effectively for the sale.   Before their sale, 26% thought they could prepare in less than a year.  Upon looking back, that belief evaporated to zero.  Planning includes:

• Clarifying personal plans for life after the close
• Understanding and maximizing the value drivers in your business
• Building and preserving your management team
• Creating or updating a viable multi-year plan to grow margins and EBITDA
• Minimizing value detractors like customer concentration, employee issues
• Connecting early with honest and experienced financial and legal advisors

Even if you do not expect to transition ownership in the next year or two, being prepared could enable you to sell at the right time.

The Importance of Trusted Transaction Advisors

Survey respondents, and subsequently panel members, told us that an honest and experienced investment banker and transaction attorney were key to ensure a high certainty of close and a successful transaction in their situation.

Brought in during the pre-planning stage, an investment banker specializing in your industry can provide valuation guidance, a transaction readiness assessment and advice about attaining financial and ‘beyond financial’ objectives.  The banker knows how different types of buyers (private equity, family offices, domestic strategic and international strategic) relate to your objectives and is most likely to pay a premium.  They can advise on the current M&A market and the value drivers and detractors in your business.  These and other insights will enable you to focus your preparation activities most fruitfully.

An experienced transaction attorney can answer estate planning and tax questions and perform key legal due diligence beforehand to avoid problems when a buyer is ready to close.

The EdgePoint brand of rethinking M&A means giving both financial and “beyond financial” aspects of a transaction informed preparation well before the sale process begins.

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Our white paper, THE SELLER EXPERIENCE – PREPARING THE OWNER FOR TANSITION is available to download at https://www.edgepoint.com/seller-experience.  You are welcome to a copy.

Parking space answer:  Turn the puzzle upside down and the answer (87) becomes obvious.

© Copyright EdgePoint 2021. Russ Warren, Managing Director, EdgePoint can be reached at 216-342-5859 or at rwarren@edgepoint.com