Today’s M&A market can be divided into two categories: what’s seen on the ground and what’s being reported.
“We’ve heard about the market volatility, interest rate increases, high inflation, but on the ground, there is still very robust M&A activity in the middle to lower-middle markets,” says Howard Bobrow, Cleveland partner at Taft Stettinius & Hollister LLP. “We are likely past the peak, but the market remains relatively strong at this time.”
Sometimes when heading to market, a business owner looking to sell fixates on a number — the price they think they can get for their company — that’s too often derived from what they’re reading in the news, hearing from peers, or were promised by an investment banker. That expectation can create misalignment. And when there is misalignment, value is lost.
Smart Business spoke with Bobrow about what M&A buyers are looking for in the market today and how sellers can maximize their value in a transaction.
What are buyers looking for?
What exactly a private equity buyer is looking for depends on whether it’s targeting a company as a platform investment — a company it intends to use as a foundation for add-on acquisitions in an effort to build future value — or as an add-on to an existing platform investment. In a platform investment, often the management team is one of the important value drivers, in addition to business metrics. Buyers also see value in a defendable business plan, barriers to entry and a reasonable path to growth. For an add-on to an existing platform, buyers want strategic fit, which creates synergies for the platform and fuels growth.
Numbers also predominately drive value for financial buyers. They’re going to look at the trailing 12-month EBITDA and projections, but their concern is largely with a company’s potential for earnings growth as their goal is to exit the investment within three to five years.
A strategic buyer isn’t as concerned about earnings and multiples because their ownership period is usually much longer than that of a PE firm. They might do an acquisition to get into a new field, acquire market share, expand geographic area or line of business, and might be able to absorb a loss for a time in order to expand what they’re doing and/or add value for their existing customers.
How can sellers maximize value?
Sometimes, heading to market, a seller focuses too intently on reaching a multiple because of some news they read or story they heard from an acquaintance. That can create a misalignment of sell-side expectations over what the market will bear. That could derail a deal, or lead to higher risk components added to deal terms. So, for instance, instead of an all-cash, fully insured transaction, which is ideal for a seller, the buyer might try to bridge that value expectation gap with a seller note or earn-out, both of which can create risks for the seller. That’s why it’s incumbent on the sell-side advisers — an investment banker, M&A counsel, accountants — to guide the seller to make decisions that increase the value of the business and don’t leave money on the table.
A buyer will know immediately if a seller knows what they’re doing based on their preparation. Buyers are going to dive deep into details such as financials, customer contracts and even systems and process. If that information isn’t readily available, or if it’s disorganized or incorrect, it can slow down or derail the process, add unnecessary costs and/or call the seller’s credibility into question. The sooner a seller can engage with M&A professionals, the more time there is to review corporate hygiene and address any issues, which often takes months. This will make the difference between just selling the business and getting maximum value for it in a transaction.
M&A professionals can preemptively audit a seller’s books, assess contracts and customer mix, as well as talk with senior management about the process and help shape the business story they’ll share with potential buyers. M&A counsel can add seller protections against post-closing indemnification risk and post-closing exposure to the deal terms, and help structure the deal to maximize value in tax-efficient way. Good counsel gives sellers the best chance of capturing the most value in what can be the most important transaction of their life. ●
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