In my 25 plus years advising clients on buying and selling businesses I have rarely seen a market as hot as the one at present. The Baby Boom Generation transitioning into semi or full retirement is making solidly successful companies available for sale. Millennials and GenXers plus a wave of foreign investors (see my blog Business Visas) are sustaining demand to purchase these companies.
Merger and acquisition (M&A) activity turned around in 2013, showed strong growth in 2014 and was forecast for sustained growth in 2015 (Information Week: WallStreet and Technology, M&A Activity Will Continue to Grow in 2015, 10-23-2014). Not only did this consensus forecast live up to the hype, 2015 proved a banner year. 2016 has started off well with a 7% quarter over quarter increase; however, there are some troubling indicators on the horizon including increasing U.S. interest rates and rising political uncertainties (Intralinks: Forecast of Global M&A Activity Through 1Q 2016).
Nevertheless, a survey of business leaders predicts that the number of mergers and acquisitions in 2016 will match or exceed 2015 according to KPMG LLP, the U.S. audit, tax and advisory firm (12/9/2015, www.kpmg.com). The M&A window is still open but for how much longer is unclear.
Lost in the news of political uncertainty, interest rates, big international deals and corporate inversions are the more personal stories of the baby-boomers passing the torch of leadership, which is likely why many of you are interested in this post. These business leaders have created and nurtured small to mid-sized business that have been successful for decades. They have successfully navigated the shift from a manufacturing economy to a service economy, the internationalization of business, the advent of the Internet, and the Great Recession. They are now facing the challenge of exiting their businesses without damaging them.
Let that last point sink in… they want their companies to continue to succeed following their personal exits. There are more than altruistic reasons for this, many baby-boomers are transitioning their businesses via ESOPs (employee stock ownership plan) and retaining an advisory role and carrying some interest bearing debt. Even when they sell to outsiders, there are often advisory periods of a year or more and claw back provisions tied to continued business success metrics. But are business leaders leaving money on the table to insure continuity? Based on a number of M&A deals I have reviewed recently I believe the answer is “yes”. I am not suggesting that business leaders just raise the price for their businesses, they need to logically and with careful planning present a fair price articulating all the values the business possesses.
What You Need to Know
How should a business leader negotiate a fair exit without jeopardizing the long term success of the business? This blog covers the key elements of a M&A negotiation to insure a fair and balanced transition for both seller and buyer. Ideally, a decision to sell your business not be merely a spontaneous decision. It should instead be deliberate and thoughtful. At CFOs2GO we advise all our clients to have both an annually reviewed business plan and succession plan that outlines the timing plus pros and cons of an ownership transition. Having such plans in place will allow you to take advantage of unique economic phenomena such as the current positive M&A environment; or the foreign investor who walks in your front door with a cash offer as happened to one of my clients recently. For details read the following blogs on the one page business plan, how to use your business plan, and succession planning.
Not all of our clients, in the daily challenge of running their businesses, find the time to develop annual business plans or succession plans. Not to despair, if you are interested in taking advantage of the current market conditions, CFOs2GO is uniquely qualified, with M&A experienced CFOs, to assess your marketability and strategy.
Businesses are sold for many reasons; to bring in new leaders, to re-focus the company, to expand the company, a strong economy, available foreign investment and increasingly to allow the baby boomer generation to transition out. There are as many personal stories as there are businesses and just as many options for fast to slow transitions; see my blog on Working from 62 to 74.
- Preparation– Business owners should allow 1-2 years of time for M&A execution. Much like selling a house, there are a number of things that have to be put in place in order to make a business marketable. This is not advice to “perfume the pig” (i.e., to cover up weaknesses) but activity to fix problems and document processes. For example, accounting records need to be clear and current, all processes should be smoothly running, and key executives need to be replaced if leaving, involved in planning if staying, and terms negotiated if there is a transition over time.
- Professional Advisors – Business owners must focus on maintaining the success of their core business yet negotiating a M&A deal requires considerable time and unique skills. The key advisor is usually a lawyer but they generally partner with financial and other experts. Some of these experts should have access to a wide range of accounting talent to provide “arm and leg” capacity on a temporary basis
What Are the Most Common Mistakes?
- Lack of a Business Plan– a business plan includes your strengths, weaknesses, markets and competitors; without this information being clearly articulated buyers will likely under value your business and especially if its growing.
- Breathing Your Own Exhaust– It’s your business and you’ve built it to the success level it has achieved. Despite that you need to step back and critically view it as a buyer will see it. You might even want to get a professional valuation.
- No Professional Advisors– M&A advisors specialize in negotiating deals; they know the market value of all aspects of a business. Employing them will result in higher valuation and sale price.
- Lack of Oversight– while a professional advisor is critical so also is the need to stay involved in the process.
- Lack of Due Diligence on Buyers– a potential buyer is exciting and represents the achievement of a goal but it is critical that the buyer be rigorously vetted. Not only their ability to pay but an understanding of how they will run your business going forward.
- Misrepresentation– fairly present your business, do not “perfume the pig”; integrity is critical in M&A. Many a time have I seen a deal fail because of a loss of trust on some relatively minor representation.
- Lack of a Transition Plan– Post sale, you must look to the success of the buyer and their ability to run your business. This plan can be very complex and you can read more about the basics in our blog on Post-merger integration.
The window for selling or buying a business with a fair valuation and great flexibility for smooth transition is wide open at present. However, like all business cycles, the window will not remain open indefinitely. Hopefully our advice is useful and has stimulated some thinking. If you would like to continue the conversation, please add a comment or give me a call for a no cost personal conversation. CFOs2GO has been advising businesses for over 25 years and as always would be pleased to assist you in any M&A planning or general financial need; consulting or recruiting.