The Point: When it comes to Mergers & Acquisitions, speeding up isn’t the answer. In fact, I typically see that if those that lead M&A would simply slow down, they actually achieve their objectives faster! So how then do Mergers & Acquisitions leaders and their teams slow down for success? In this two-part post, we’ll explore exactly how slowing down to speed up can be achieved in Mergers & Acquisitions… Enjoy!
The Effect of COVID-19 on M&A
The pandemic has certainly had its impact on the economy. From lockdown mandates to the rebooting of the economy (and sometime unfortunate re-lockdown occurrences), we’re seeing a major effect on the bottom lines of organizations we’ve determined as prospective M&A market verticals. Even with the hope of antivirus on the not too distant horizon (hopefully!), there exists a number of companies that will be pressured by creditors to divest assets to pay down debt and avoid going into business rescue (or liquidation), or to assist in funding ongoing operations due to a cash flow crunch.
With abbreviated timelines, M&A activity now additionally has certain legal and commercial challenges for both buyer and seller at play. Think asset preparation for sale issues give the shortened timeline, providing the buyer with accurate information and time to conduct thorough due diligence ultimately sets the stage for deeper valuation gap analysis.
If money is made during the initial acquisition moment, the buyer must mobilize funding for quick deployment while the seller balances the need for speed and complexity of the divesting process.
Mergers & Acquisitions Strategy
In order to speed up, we’re going to have to slow down. A strategy to help accomplish that is to view the Mergers & Acquisitions Strategy from the Seller’s perspective. With the Seller’s perspective in mind then, the following is a six (6) stage strategy a Seller could employ to make the transaction a reality:
- Business Valuation – What multiple (typically 3-5x) applied against what financial term (Cash flow, Seller Discretionary Earning – SDE, and/or EBITDA)? Additionally, taking into account current COVID-19 financial performance considering revenue, expenses, and liquidity are important business valuation determinants.
- Deal Structure – What will the proper deal structure look like? From a financing perspective, will it be made up all/parts institutional/non-institutional financing (Banks, Private Equity – PE, Family Office funding), seller financing, and/or buyer funding? Additionally, will there be a need for the seller to provide a transitional services agreement whereby they agree to stay/run the entity during the transitional period typically of 3-36 months?
- Business Listing/Auction – As a seller, you’d like to receive the most money for your years of service to an organization. What is the best route to get the most money then? Typically, we approach organizations not listed for sale prior to them listing their business. With these Sellers, they typically don’t know how much their business is worth. Introducing them to a valuation service can be beneficial in determining the value of their entity as well as a potential source for realistic listing of the company. In some situations, businesses are already listed for sale on sites such as BizBuySell.com. Lastly, in distressed situations a business will go to an auction sale process.
- Legality – There typically is involved a series of professional advisors (I wrote about surrounding yourself during the M&A process in a post that you can read by CLICKING HERE). Know that as a seller disposing of assets sometimes there is a need for disclosure of key regulatory approvals that may be required to implement the divestment. Understanding these issues enables a seller to (1) be forthright about any problems associated with the organization’s assts and (2) accelerate the due diligence timeline towards the creation of an acquisition agreement.
- Buyer Qualifications – Who is going to be the ideal buyer of the business? Most owners have a variety of Buyers approach for acquisition. However, not all Buyers are created equal, and therefore should not be considered as such. Typically, there is a Buyer profile that can eliminate potential Buyers and provide a strategy for who the owner ideally would like to see carry on their legacy.
- Leveraging Technology – If the pandemic has taught us one thing, it’s that virtual meetings can maximize your efficiency if conducted properly. Therefore, leveraging technology (virtual meetings, email with clear communications, etc.) can greatly enhance the offerings value to Buyers.
Slowing Down to Speed Up for M&A Success!
So what is your goal regarding established Acquisition Strategy (You can read Tip of the Spear Ventures Acquisition Strategy by CLICKING HERE). Our goal at TIP is to acquire one (1) business each quarter. That’s a lofty goal, and requires numerous business explorations to be conducted each month. But with such a goal, we know that speeding up isn’t the answer. In fact, we’ve found that if we simply slow down the acquisition process we achieve our objective more quickly.
Speeding up wasn’t the answer for us! With speed came a host of issues, such as increasing complexity, unnecessary energy consumption, and overlooking of key due diligence criteria. We also found that we were quick to “fall in love” only to be heartbroken because we overlooked obvious signs that the business wasn’t a good fit for our portfolio.
By slowing down, we were able to go deeper in our due diligence. As a result, we dealt more effectively with the typical increased levels of complexity, overcame easier the obstacles/challenges that presented themselves along the way, and used far less energy. Not only were we able to go deeper, but speed was attained so that we could go faster towards achieving our goals/objectives.
In this post, Mergers & Acquisitions: Slowing Down to Speed Up! Part 1, we explored how slowing down to speed up can be achieved in Mergers & Acquisitions. Specifically, we reviewed the effect of COVID-19 on M&A, a six (6) stage Mergers & Acquisitions Strategy, and how slowing down to speed up can result in M&A success.
PS – In “Mergers & Acquisitions: Slowing Down to Speed Up! Part 2” we’ll discuss Pricing Flexibility and Fairness, The Breakup Clause or MAC, Targeted Due Diligence, and Competitive Analysis. You can read it by CLICKING HERE.