Buying or selling a business – how to approach?

First and foremost, it is very important to know how to deal with the M&A. Over the decades, the market has shaped the M&A process to such extent that it consists of the most optimal activities. It reflects the knowledge and experience of all participants who have dealt with mergers and acquisitions in the past. Therefore, going for a non-standard approach is unlikely to pay off. Information exchange, process dynamics, risk perception, and last but not least, trust gaps critically affect the likelihood of M&A deal success. Consequently, the misconduct of M&A process & M&A best practice is often just a waste of time and money.

Businesses for sale or businesses looking to acquire need a professional. They need someone to prepare them for the M&A process. Not only in terms of documentation, but also in terms of forming beliefs. The expert can be an internal or an external person. Since such transactions are more of a one-off nature than a continuous approach, companies usually seek the help of specialized financial advisers. The key to choosing the right expert is to have the right knowledge, experience and most importantly – your trust. Statistically, more than 60% of business acquisitions are unsuccessful from the perspective of shareholders’ value creation. Therefore, M&A deals are more than obviously very delicate, so critical assessment of the opportunity is of crucial importance.

Key hints LINKED TO BuyING or sellING businessES

Due to the complexity of M&A transactions, matching the needs and expectations of parties involved usually lasts and requires considerable effort. Changes in the business environment of the subject business, one-off events or something else normally require updates of financials, further explanations, etc. The latter is often seen as a burden. Motivation plays an important role in M&A deal-making, so don’t give up too fast!

Expectations of participants should be formed on a well-founded basis. Too big difference in expectations and perceived value is often negatively accepted by the opposite party. Such behavior does not improve the negotiating position, as many people think, but rather repels the potential investors. For that reason, more serious M&A players expect from the other party to engage the M&A consultant to conduct services such as due diligence and corporate valuation.

Many are surprised by the fact that a typical company is sold on average over a period of one to two years. Time depends on many factors, including equity share size and characteristics, attractiveness of the company and the industry, plans and activities of the controlling owner, capabilities of the management, profitability, growth, financial position, hedging options, dividend policy, general market conditions, etc. Due to that matter, ownership changes require preparation and vision. Especially for those older owners who may even be involved in running a business, it is crucial that they start thinking about transferring ownership on time.

Successfully executed mergers & acquisitions also require a great deal of tact and flexibility. The analysis of comparable transactions serves to determine the valuation and payment terms, but also provides a great insight into the individual M&A transaction structures and the specifics that participants have explicitly addressed in certain ways in the past. It is therefore possible to identify in advance how atypical the participants’ individual expectations are and to assess how likely they will be accepted by the counter party. Not being flexible may compensate through the loss of value, so make sure that you are aware what is realistic and what are the related boundaries.

No matter how much the participants of the M&A process strive towards rational behavior, it is always possible to detect involvement of some emotions. There is nothing wrong with it, as long parties are not misled. Some major fails can be linked to lack of proper control over individual’s weak points, unsuccessful prevention of extremely negative/positive thinking, no mechanisms to prevent irresponsible behavior, poor coping with pressure etc.

Business value is derived from discounted future benefits in the numerator and risks in the denominator. From that perspective, actively addressing probabilities of negative business surprises and unwanted operation turmoil is a must. To be more concrete, investors often appreciate the willingness of executives to remain on board, at least in the foreseeable future, after the stock purchase agreement (SPA) or asset purchase agreement (APA) is signed. If existing executives no longer see themselves working for the subject business, the M&A deal may easily fail. For this reason, it is important to understand how all parties see major risks and come up with mutually acceptable options of ownership transition.

M&A best practice business cases prove that integrity, objectivity and transparency importantly contribute to building the prerequisite trust among participants in the M&A process. The information should thus be presented as it is. For example, what does a SWOT analysis tell you if it mostly lists strengths and opportunities, although in reality the subject business also has plenty weaknesses and threats? It is likely that after one realizes the biased approach, he or she will be more suspicious about the information you will share next. Participants, however, appreciate that certain information also comes from the right mouth. Hiding things can have very negative consequences even after the M&A deal is done.

The prerequisite to successfully close the M&A deal is also to adequately inform the counter party. However, participants should also be aware of the sensitive nature of the M&A process and information. It is therefore necessary to responsibly agree terms and limitations of sharing and use of information. There is often a fine line between responsible handling and complication. From this point of view, coordination between participants is sometimes challenging and knowledge of standard practices is inevitable.

Mergers & acquisitions are usually of more significant importance to parties involved. Decisions made are therefore not really a matter of reckless behavior. Both sides play own tactical game to maximize benefits. Regardless of different views, respectful and professional communication is expected. Often, the M&A process progresses faster, when neutral person intermediates, interprets, complements and guides both parties.

One of the most important things we all too often forget is that the bargaining power of buyers and sellers throughout the M&A process is not always the same. In the initial stages of the M&A process, when more potential buyers are on the horizon, the seller is in a much better position than the buyer, but towards the end of the process, when only a few are given the opportunity to advance, the situation is reversed. Due to that, any missed opportunities are difficult to make up for. For example, the letter of intent often comes incomplete, also as a reflection of the desire to continue with “more serious” activities. The seller should strive to point out the LOI deficiencies immediately, since the bargaining power is in this stage at its highest levels. Nonetheless, the way how the letter of intent is drafted also very well indicates the true motivation for the party and the level of experience.

Source: Consilue analysis.

To successfully target the potential investors, one needs to be aware of the situation that best describes subject businesses for sale. Are we talking about the growth capital, succession, MBO, carve-outs, spin-offs, distressed business or others?

Potential strategic acquirers typically focus their attention on consolidation of business entities or business assets. In other words, generation of synergies through economies of scale, diversification, resource transfer or a combination of the above plays an important role. The more synergies there are, the higher the appeal to buy certain business. Finding the right players and informing them properly about the investment opportunity is therefore crucial to successfully complete M&A transactions.

It is important that participants enter the M&A process well-informed, determined and with clear expectations. The following is of extreme importance especially when skillful buyer leverages its negotiation power and agrees on exclusivity period in exchange for resources invested in due diligence, corporate valuation and negotiations. For the seller, this is often seen as a sort of a bet, since the decision has to be made on the pre-formed sense of the market.

WHEN TO Buy or sell business?

Competition today is increasing. More and more companies and industries are entering in the mature phase of their life cycle, which reinforces the need for inorganic growth. This is the reason why lots of them nowadays have M&As even as part of their strategies. In the mature phase smart M&As often boost shareholders’ value creation more than organic growth.

Source: IMAA. Consilue analysis.

Despite the increasing number of M&A transactions, times to sell or buy a business are not always appropriate. It is important to be aware of where we are on the M&A activity curve and what are the factors that influence this situation. Currently (in 2019), the EU M&A market is positively affected by relatively attractive corporate valuations, high liquidity, easy access to credit and others. The graph clearly shows that current levels are lower in value terms than they were before the financial crisis, which is not the case for the United States. As Europe loses on its competitiveness, it also becomes less and less attractive in terms of consolidation trends. However, it is true that every industry and every market has its own specifics of movement and it is good that the participants are aware of them.

Our success in mergers and acquisitions is also significantly influenced by M&A trends. Recently, for example, investors have been giving an increasingly important role to technology. Then there are unexpected tariffs initiated by the US, which caused a wave of Chinese investment in Europe and so on.

HOW TO DECIDE WHETHER OR NOT TO Buy or sell business?

The decision to sell or buy a business must be made rationally. Every business opportunity has its own life cycle in the eyes of every individual. But also times are good and bad in the eyes of every individual. The market requires more each day. Wiser ones use their ability to adapt as their advantage, others don’t. The important thing is, that we either take the opportunities or we begin to lose. There is no room to debate when selling and buying businesses. Investing is not politics. Selling or buying a business is not a bad decision. Not making a progress when running a business is. The market sooner or later eliminates those that operate below its requirements, so it is wise to realize this as soon as possible and take action.

It may happen that one is forced to make an investment decision (buy or sell business) due to third factors, so knowing the probabilities of such events is important. Sometimes it is better to take a preventive action as well, especially when we are on the edge of major macroeconomic or geopolitical concussion.

Corporate owners often get asked how much their business is worth. Most of them are not able to answer this question properly. Such ignorance is detrimental and can also be a reason for lost opportunity. Behind many such questions there is a potential acquirer, so it’s always good to be aware of your investment’s value.

Investment decisions, in knowledge, in technology, in assets, or something else, tailor our destiny. What we invest in today impacts our yield tomorrow. Compound interest is the thing that makes us, or not, more successful in time. According to Albert Einstein, this is the most powerful force in our universe, so it is nonsense to oppose it.

Are you interested in the M&A support that we can offer? Share with us some data through web form – Mergers and Acquisitions – M&A consulting!

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The owners of a privately-held engineering company engaging in medium-size utility projects approached us in panic to organize the sales process and find a solution to provide the sufficient liquidity until the new owner steps in. The company was performing extremely poor recently and felt into serious liquidity problems. Revenues collapsed and levels of financial debt rose in three quarters of a year from sound indeptedness to 180% D/E and 10,3x Debt/EBITDA. Owners were 100% sure that the company is on the way to bankruptcy and were only expecting a small fee for it.

According to their opinion, potential buyers could be managers, currently leading the company.

Addressing the pain: Company worth in the context of value generation

Consilue approached the valuation in line with the top-down approach, which also included in-depth analysis of the industry. After careful examination, we figured out that the demand for projects is highly correlated with cofinancing activity of EU structural funds and the valuation date matched the transition between the two investment cycles. Furthermore, the size of the EU contribution for the next investment cycle was also significantly changed for the key markets the client used to serve in the past.

After understanding the reasons which pushed the client into liquidity issues, we performed the in-depth financial analysis. We broke-down business into individual projects and analyze and project the developments one by one. We figured out that the company is in fact expecting a good profitability in the following two years, they only need to re-focus their activity on more prosperous countries in the region. Furthermore, also a significant increase in the cash conversion cycle (mainly increase in accruals) already indicates better times and is in fact by its nature only temporary.

For decision-making purposes, we decided to simulate the generation of economic value by years with and without operational restructuring and improvement in profitability. The purpose was to show the shareholders the importance of the active involvement into the future business activities of the company.

Later on we performed also the corporate valuation based on going concern. Since we used market value as our base value, also successful operational restructuring was assumed.

Results: Company worth estimate done right

We have showed the shareholders that the market value on the date of valuation is in fact significantly above their expectations. They understood that they were played by managers to sell them the company for the cheapest possible price.

Despite the existing high levels of debts, we persuaded banks to support the company with the short-term liquidity injection and stand aside.

Client’s testimonial:

When estimating the value of the company we took the EBITDA and multiply it with a given multiple. That was so wrong and almost costed us millions. One truly needs to understand where the value comes from. In our case, it was generated from the change in net working capital (decreasing the accruals) in the first year and strong EBITDA in the first two years.

We are sincerely thankful to Consilue for showing us the right path. Now we are about to change the management and actively approach the operational restructuring.

Advisor’s thought:

Valuing a company requires a deep understanding of the business. Often the process reflects many interests and fast response – as in given case – which makes it challenging.

The post Case study: Your company worth is more than you may think appeared first on Consilue.

Business valuE determinants

Business value is affected by cash flows from operations, changes in net working capital, net investments, growth potential and underlying risks. Any measures improving these determinants will influence the business value.

However, not everything is in the power of companies to influence. Business worth is significantly impacted by macro factors. In this context one should understand the importance of economic climate as well as industry developments and trends. This is why timing to M&A is very important.

Hint: As consultants we often prefer to present the client the value development cycle. Business valuations in various points in time is a good reference point for them to see if they are confident with the business value at a particular time.

Prioritizing the measures – doing the right things counts

The more value the company adds to the supply chain, the more important player it is and higher its business value. For that reason, it is important to understand first the needs and requirements of key stakeholders and ways to meet them effectively and efficiently. Based on that fact, one should then be prioritizing the recommendations shared below … 

Tips & tricks for higher business valuE

Step 1 to higher business value: Ensure high cash flows from operations

– Differentiate your business
– Brand your product
– Tie your clients to your products/services
– Focus on most profitable products and/or services
– Acquire the right sales & marketing techniques and grow your revenue
– Appreciate and retain your key employees
– Establish barriers to enter the market
– Gain bargaining power against other companies in the supply chain
– Exploit large prepayment discounts
– Supervise the COGS
– Enhance the productivity of employees
– Optimize interest rates and taxes

Step 2 to business value boost: Optimize your net working capital

– Establish partnership relation
– Negotiate better payment conditions
– Optimize inventories and inventory turnover

Step 3 to business value maximization: Optimize your net investments

– Be aware of consumer trends
– Choose the right timing for acquiring new technologies
– Carefully plan capital investment – make investments that will support growth
– Increase the capacities in line with demand
– Ensure that the level of investments covers the growth potential
– Optimize financing

Step 4 to business value enhancement: Enhance your future growth potential

– Innovate with business model and come up with creative strategy
– Rethink processes and stick only to those that add value to your clients
– Develop new products and services

Step 5 to high business value: Minimize the risks related

– Keep the level of indebtedness at the level of comparable companies
– Endeavor appropriate product/service mix diversification
– Disperse your sales geographically
– Gain deals of appropriate size
– Supervise the creditworthiness of clients and suppliers
– Assure the level of fixed costs as low as possible
– Inform owners extensively and on a regular basis
– Give priority to transparency

Maximizing the business value is the most important criteria there is in running your business. For that reason it is important to follow the value of your company continuously, strive to bring the value maximization goals closer to the stakeholders involved, introducing the value based management techniques and setting up the KPIs based on business value maximization principles etc.

As a rational investor, one should always keep in mind also the exit strategy. The fact is that as an owner you will not be able to run or follow the company forever, so have a plan how you plan to divest your investment from the very beginning.

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