Prepare thoroughly to win the M&A battle

Sun Tzu wrote in “The Art of War” that “Every battle is won before it is ever fought.” It is just as true that the success of every company sale is largely determined before the first buyer is approached.

Sellers are correct in believing that the success of their sale will largely depend on its foundational elements of value: sales, earnings, assets, product lines, etc. Without these, there is little to sell. However, I often see the thoroughness of preparation materially increase — or decrease — the value received, causing the seller to “win or lose the M&A battle.”

Ideally, the M&A planning process should begin years ahead of the sale process. This happens as a company’s leadership strategically molds the business into what future buyers will want to buy. However, tactical preparation begins six to 12 months from when a sale process will commence. At this juncture, sellers should address specific items on which buyers will inevitably focus.

  • Are there holes in the management team? Filling these should happen sooner rather than later to give the recruited or promoted individuals time to settle in to their new roles.
  • Are the plants environmentally clean? A Phase I assessment, if necessary followed by a Phase II, will confirm this and be critical to any buyer. Furthermore, if problems are uncovered, they can be handled by the seller at a much lower cost and without the deadline of a closing.
  • Are the financial records vetted? A quality of earnings study (similar to an audit) performed by an accounting firm will uncover any irregularities in time to address them.
  • Does the company have any unresolved legal disputes? If so, they will generally be much easier — and cheaper — to resolve before the sale process is under way. (During sale negotiations, the other side will have enormous leverage because its legal dispute could block a closing).
  • Is the company’s website attractive and up to date? In today’s world, it serves as a window into the business, almost as important as the offering memorandum.
  • Is the company’s operational and financial software fully functional? Especially critical is that any software licenses be transferrable.
  • Are the company’s internal legal records in good shape? These include board resolutions and minutes, leases, operational permits, management contracts, insurance contracts, etc.
  • Would the plant benefit from inexpensive equipment upgrades or beautification? Although major investments in capital equipment may not make financial sense, making targeted upgrades, repainting, sprucing up offices and meeting rooms, etc., can make the whole company more appealing to buyers.
  • Could the company divest or distribute any noncritical assets? This could include excess cash, equipment, inventory, real estate, etc.

Preparing for the sale process is akin to an army’s checking its weapons, ammunition, vehicles, medical supplies, etc. prior to a battle. Because “once the M&A shooting starts,” it will be too late to effectively implement simple fixes that, if done earlier, would have been easy and cheap. What’s more, the sellers will come across as unprepared and will cede control of the closing calendar.

If Sun Tzu were a businessman today, I assure you that he would prepare thoroughly for M&A transactions. ●

Mark A. Filippell is managing director at Citizens Capital Markets

Mark A. Filippell

Managing director
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