Historically, at a high level, we know that the M&A market runs in cycles. Understanding the broad market as to where we are in the overall M&A cycle is step one. But, that’s not always the best indicator. That’s only one element of understanding when it’s right to sell. Determining when to sell should also take into consideration the specifics of the industry and what’s happening within a given industry. The best time to sell is when the industry trend is going positive at the same time that the M&A trend is positive.
So for example, if you have a Software as a Service (SaaS) company, you should consider the broad technology trends. Where does the company fit in the industry, and who are the other players in that space? You can begin to get a sense of if the timing is right and if the dynamics within that industry will value or appreciate what your company has to offer strategically as well as the core economics of the business.
Particularly if you think about the lower middle market, we tend to deal with this issue of the company has made investments that haven’t materialized or have been realized in the P&L. The business owners are always wanting to get paid for value that’s inherent in the business but isn’t showing up yet in the company’s cash flow. One of the best ways determine the right time to sell is to really articulate and understand that strategic component of the business and how it plays into a market trend in a positive way. When this is mapped out, you will be able to determine if you’re on the growth curve that buyer like to see; you’re not too early in it but you’re not at the very peak either. When you wait until you get to the peak, it may be too late to sell for maximum value.
We surveyed private company sellers after their deal was done to gain insight into what was important to them and to better understand the selling process through their eyes. While we are located in the Research Triangle Park area of North Carolina, we leveraged our national network of contacts to gain broad perspective in a variety of industries and states. Below are a few statistics that might help you as you think about selling your company (or helping your client in the process):
Number of survey participants
Years in which companies were sold
2010 – 2014
As you can see from the chart below, companies representing the lower-middle and middle market participated, with revenues ranging from a few million dollars to nearly $250 million.
So where did the advisors add value? That’s the chart below, ranking the area of value-add by highest or most value to lessor. As you can see, the highest ranked areas were about the credibility attributed to the seller based on the advisor’s credibility coupled with leading the process and having an understanding of the transaction to negotiate on the seller’s behalf. On a combined basis, these should enable the seller to achieve value that they might not otherwise have realized on their own. Contrasting the value of legal counsel in the negotiating process, a M&A advisor should be able to assist in structuring the economic elements of the transaction to optimize the deal for you. Surprising to many sellers is that “finding or identifying the buyer” is not on the top of the list. It is important, and there should be solid process for understanding the logical buyer groups and who the key players are in each; however, actually contacting and get to the buyers is much easier in today’s environment than you might expect. What is not so easy, is getting through their filter as a viable acquisition target ….in our view, this is why credibility of the seller ranked higher.
Two additional areas of value add are worth noting. First, preparation for the sale process is so critical and relates directly to credibility. A key concept above all is elimination of surprises to the buyer. Surprises Kill Deals! It is better to spend the time, understand the issues and opportunities specific to your company, and proactively prepare and address them at the right time in the process. The second and last area of value add in this post deals with communication and negotiations. Private equity and strategics are the two main groups of buyers. In both cases, management needs to preserve and build their relationship with the buyer as the process gains traction. Invariably there will be tough issues to be communicated and tackled. The M&A advisor should be able to run interference for management on the difficult and contentious issues, allowing the seller to preserve their goodwill in the relationship. Having a third party push on these deal points also gives the seller a fallback if the advisor pushes too hard. After all, you can always fire the deal team …you can’t fire yourself as the seller. So what you say is hard to retract.
I realize that this is self-serving, but we found in the comments, consistent feedback from experienced sellers indicating that they use a third part to facilitate their transactions.
In 2012 we published our book on mergers and acquisitions ….it is called “Middle Market M&A: Handbook of Investment Banking & Business Consulting“. One of the topics we address is financing acquisitions and various ways to thinking about getting deals done. In the middle market, funding strategic deals is often a mix of senior debt coupled with mezzanine and some type of seller financing (i.e. seller note or earn-out). If your company, as the buyer, is a lower middle market business itself; a key to being credible in the negotiating process is having evidence of financing before you enter discussions. This essentially means building an acquisition strategy and plan, then obtaining buy-in from lenders and investors before going to market. An advantage of this approach is having the experience and support of your financing sources early-on and in due-diligence. Overall this helps improve the likelihood of a successful transaction.
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