Our goal is to fully prepare you for the biggest moment of your life. You have worked for decades to build a successful business and it’s now time to pass on your life’s hard work.
Our M&A Process involves three phases that help you navigate the complex M&A process and get you fully ready for a successful exit.
Preparation
It’s of paramount importance to understand the time horizon for the desired exit for the founder / shareholders. If the desired timeline is a year or less, it’s prudent to focus on changes that can have high value to a buyer but lower risk for the business. Major changes should not be implemented during this process if the time horizon is short or the business owner does not have the motivation to invest in improving the business and be prepared to do the hard work.
1. Business Analysis – Risks and Strengths
Our first step is to fundamentally evaluate your product / services to the target market, competitive landscape, barriers to entry and management team. It’s important to be objective in your analysis of the business through the lens of prospective buyers. Most business owners tend to underestimate the transfer risks to a buyer because the business is a lower risk in their own hands. Businesses that are founder driven with no management team or fewer trainers employees will receive lower multiples as this significantly impacts risks for the buyer. It’s also important to understand the potential growth of opportunities for the buyer and how long the management team would stay to make a successful transition.It’s also important to be honest about a few of the challenges you are facing now as it helps to build your credibility with the prospective buyers.
2. Business Valuation
We use standard industry methodologies on how much the business could be worth in today’s market by buyers. We will conduct a preliminary due diligence of your business based on the last three years’ financial reports – Income Statement, Balance Sheet and Tax returns along with the projected format for the next three years. Businesses with consistent revenue and profitability is highly desirable for the buyers as it significantly increases the chance of financing by banks. Businesses with subscription revenue also get higher multiples compared to businesses that require ongoing sales efforts to drive revenue each year. Customer concentration is another major risk that needs to be analyzed thoroughly. Customers that drive more than 20% revenue is seen as higher risk for the buyer and needs to be disclosed to buyers well in advance.
3. Owner / Seller Education
You are taking a huge step in deciding to go to market to receive offers from qualified buyers. It’s important to 100% confident in making this decision
– Personal preparation is equally important as preparing the business itself. It’s very important to understand how your lifestyle would change after a potential exit. Do you want to be involved in the business in some capacity? if yes, for how long? Will you be retiring completely or semi-retiring and take on passion projects or start a new business? It’s important to have a plan on what you will do with your time to avoid boredom. Typically, a non-compete agreement is expected to be signed by all owners so it’s important to disclose your plans to the buyer if you are planning on being in the same industry. Some founders find it very hard to let the business go so they tend to hang on to longer than they should resulting in declining revenues. Timing your exit at the right time is a key to success.
– Tax Analysis & Deal Structures – Most business owners in their ideal world would prefer a 100% clean cash offer with no conditions at closing and a shorter time commitment for transition.. In today’s deal market it would be very rare to get an all cash offer. Typically, the buyers expect sellers to take some deferred considerations in the form of seller financing notes, earn out or roll over equity to show confidence in the business when they are not in the driver seat. It’s also tax advantageous as the capital gains tax could be spread out over a few years. Deal structure would clearly indicate where the buyer sees risks in a deal as it’s a way to mitigate risks for both parties and find a deal that both parties are confident about a successful result for them, employees and customers/clients. If there is a value gap and anticipated cash at closing vs net worth required to fund the lifestyle of the owners then typically it may be advisable to grow the business before going to market.
What’s key to consider is the net proceeds from the exit at closing and whether that would be sufficient to fund the desired lifestyle for the founders. It would also be important to factor in whether there is a stay plan for the key management team to ensure that they are rewarded for their hard work as well and the buyer would feel confident that they would stay for a few years for a smooth transition. Also, it would be a good time to evaluate tax impact and ways to mitigate taxes using tax-smart investment opportunities. Typically, estate planning, 1031 exchange if a real estate is also involved must be planned well in advance before the closing happens.
– Creating a Deal Advisory Team – It’s also a good time to form your Deal Advisory team consisting of M&A Attorney, CPA, Wealth Advisors and Key Board members who will be helping you evaluate offers and complete due diligence to help complete the deal successfully. Forming this team helps you to be confident about selecting the right buyer while also avoiding delays in deal closing.
Deal Marketing
1. Information Memorandum – Creating a Confidential Information Memorandum (CIM) is the most important step in the deal marketing process. It’s important to put a clear, concise and compelling story about your business and why you now are ready for an exit to prospective buyers. This process typically involves about 20 to 30 hrs of your time in completing a questionnaire. The quality of the information you share with us would help to produce a good marketing document that would help the qualified buyers such as strategic buyers and Private Equity. Remember, these buyers are often working on many deals at a time. Each deal gets reviewed once in their weekly meetings and if it does not get selected in the initial screening it would be a missed opportunity. During this step, we will also be creating a data room that would have additional confidential information that we would disclose to the buyers once we
2. Identifying Buyer Targets – We always aim to cast a wider audience for the prospective buyers to attract multiple offers.
Our campaigns will primarily be focused these buyer categories:
– Strategic Buyers who are already in the same industry and marketing to your customer segments is an ideal buyer. You could potentially be a good add-on product or service for their existing sales force. They often are willing to offer the highest multiple for your business and somewhat too flexible to Revenue and EBITDA requirements compared to Private Equities. We will be compiling a list of strategic companies and we would work collaboratively with you in creating a complete list of these companies and identify the contacts to reach out to these companies.
– Private Equity Buyers are experienced deal makers as they have a portfolio of companies in multiple funds that they have been running and they have an experienced team to conduct due diligence and track record of success based on their past performance. PE buyers are well funded and they sometimes use a combination of cash _ debt financing to fund deals. They could offer an attractive multiple for valuation but they are very selective in their deal making with strict criteria on minimum revenue and EBITDA targets, historical financial performance, revenue concentration and many more factors. The Deal Advisory team you have formed earlier would really be helpful to complete a transaction with PE buyers.
Well Qualified Individual Buyers could be potentially a good buyer for your business particularly if your business meets bank financing requirements and deal size is typically less than $5M. These buyers have saved good capital to invest in a business and possibly looking to move from their corporate careers. They are often flexible on revenue and EBITDA requirements but they could be an emotional buyer so this could potential add a few risks to the dea
Successful Closing
- Offer Accepted– Hopefully at this stage, we were able to attract multiple offers based on our marketing efforts so the DEAL Advisory team can help you evaluate the offers so you can decide on the right deal for you based on your exit plans we have developed together. Typically the buyer’s deal team prepares the Letter of Intent so they may have several clauses written in their favor. That’s why it’s important to have an experienced M&A attorney who is a deal maker and someone who knows how to navigate the negotiations with standard deal terms that are commonly accepted based on the recent deals for your industry. This could help you to have a fair deal to all parties. Having a mutually accepted offer from both parties is a key milestone for the deal but we are still only half way done as LOI is a non-binding document.
- Buyer Due Diligence – Once we have mutually signed LOI, we will organize a due diligence kick off meeting. Typically, the buyer will have his deal team come up with a list of documents, questionnaires etc for you to complete. The due diligence process typically consists of these three major components – business, legal and financial due diligence. The data room that we already compiled would be most useful to disclose to the buyer targets. Even though we have already anticipated buyer objections and risks, there may be unforeseen surprises and these surprises usually kill deals. The buyer in some cases may want to talk to a few of your key management staff and clients / customers to validate the strengths, risks and opportunities we have already disclosed to them.A deal may typically fail a few times before it can close. That’s why completing a deal takes time and effort. Usually, we would disclose these risks identified to all other buyers much earlier in the process so they are fully aware so this won’t be a surprise later. Once the buyer is reasonably satisfied with the due diligence process, he will have his attorney draft legally binding agreements that can be negotiated and finalized for signatures.
- Successful Deal Closing: Great news. The buyer has completely satisfied and all closing documents are ready for signatures now and the deal is ready to close. This is a very important time to make sure that you have drafted a communication plan to inform the management team, employees and customers. This is preferably done after deal closing to avoid any confusion.
Also, this is an important time to make sure that you execute your tax smart plan that you have already planned with your advisor to help mitigate tax burden. Typically, estate planning, 1031 exchange, Opportunity Zones, Deferred Sales Trust (DST) or some of the vehicles available to reduce tax burden.
