It’s no question that M&A has been more challenging in recent years, having been impacted by higher interest rates in the financing markets, geopolitical factors including potential tariffs, and a burdensome regulatory framework, to name a few. However, deals for quality assets are certainly still getting done in this environment.
The key characteristics separating successful deals from those that fail to close are often time in planning and preparation, in anticipation of how these and other potential challenges may impact the business. For these reasons, it’s important for the owner and the M&A advisor to first take a thorough assessment of the reason(s) for selling, the objectives expected to be achieved, potential deal challenges, as well as the state of the business itself.
In any business sale, it’s important for the owner to align with the M&A advisor to explain why a sale is being considered and what the intended objectives for the process are, before approaching the market. Maximization of value, speed of execution and certainty to close are the most common factors around which a process is designed. However, other important factors such as cultural preservation, employee treatment and leaving a “legacy” can be just as, if not more, important to an owner.
Understanding these motivations and to what degree each of these factors is important, will aid the advisor in designing a bespoke sale process. Furthermore, the review of these objectives, as well as situation specific items such as the importance of confidentiality to employees, involvement of the senior management team in the process and potential complexity of due diligence, helps to inform certain process execution features such as how broad of a process to run, who the intended buyer audience should be and any unique positioning or buyer education.
Ensuring that the business is adequately ready for a potential sale from a financial, operational and legal perspective is of paramount importance. To properly accomplish this, an honest and open assessment of the business between the owner and advisor must be performed to review the typical items a buyer will expect and need to know.
For finance, schedules of financial results, audits, review of budgets and projections, and any tax related implications will be under scrutiny by a buyer. Confirmation is needed that these items are prepared in a clear fashion that buyers will be able to understand. A good advisor knows what a buyer will expect in these matters.
Understanding how the business operates today is important, but even more so is how it will be able to operate in the hands of a new owner. Will the customers, suppliers and employees stay? Is there a strong management team staying with the business or one that has been identified? Making honest assessments of these items, and how to potentially address or mitigate ahead of launching a sale process, will allow the diligence process to run more smoothly. Legal review of contracts and any disputes or liabilities is typical confirmatory diligence in any process.
In terms of the actual marketing and due diligence materials in a transaction, a process will only move as quickly as the documents are able to be provided to buyers, and in a succinct and easily discernable way. Any delays in providing these items, or providing items that are unclear, adds to the time it takes to educate the buyer and for the buyer to efficiently conduct their diligence.
Furthermore, it could inadvertently project a lack of conviction on behalf of the seller to ultimately transact, or competitive weakness in the process. For this reason, getting as much of the marketing and diligence items complete ahead of formally launching a process helps to avoid any surprises or business or process interruptions later.
To aid in this, it’s often helpful to have an individual or team identified at the business that can liaise with the advisor – a so called “under the tent” group or individual that is aware of the process and its requirements. This will enable the efficient flow of information from the proper sources to sufficiently inform and educate the buyer. In turn, this can lead to more engagement and effective negotiation with the buyer once in a process, which further helps to achieve the ultimate intended deal objectives.
T.J. Wallace is a Managing Director at Hyde Park Capital, advising healthcare and industrial clients. He has 20 years in corporate finance including roles at Bank of America, Jefferies and Deutsche Bank. He holds degrees from Bucknell and Cornell.