The impact of M&A and why you can’t ignore it

Exit strategies, unlooked-for opportunities

If you don’t want to sell your business, you still need a long-term strategy. That means not just a succession plan, but an exit strategy, says Bill Remias, senior vice president at Huntington.

“An exit strategy meets the needs of the owner, where a succession plan meets the needs of a business,” he says.

Business owners should have a living document that changes as their situation changes, in order to put in the right financial controls, management team, business entity, tax strategy, protections around intellectual property and more.

“When I talk to business owners and they tell me they have a plan and they can articulate it, especially if they have a written plan, typically I find that they’re better run businesses than companies that don’t,” Remias says. “So, putting all of this in place can help you run your business better.”

With all the money that’s out there, it’s always good to be ready, says Steve Bennett, Central Ohio Regional President of U.S. Bank.

“Even if you’re not thinking about M&A, it’s always good to be prepared because someday you might get the knock on the door, and you may get a valuation that’s like, ‘Oh my gosh, I never thought my business would sell for this much. Yeah, let’s go,’” he says.

On the buying side of things, Remias has clients who don’t want to set up an acquisition strategy. They plan to grow their business the way they always have. But sticking to the status quo usually isn’t the best business plan.

Many baby boomers plan to exit over the next five to 10 years. At the same time, the U.S. is in the middle of the longest economic expansion in its history, and eventually that will cycle into a downturn.

The convergence between those two events could present an opportunity for younger businesses, especially if a company knows where it would like to grow, he says.

“Being knowledgeable about acquisitions, gaining experience in it, and working with some of their advisers and their management teams to develop a plan, even if they don’t need to exercise it, could be extremely valuable,” Remias says.

Buying a business is risky. It may make sense to dip your toe in, doing a small acquisition or add-on to understand how to integrate systems and people.

“You just think you’re going to put one and one together and it’s going to equal three. And sometimes you put one and one together and it equals one and a half, because you’ve missed on integration and culture,” he says.

Good growth is great, but doing it the wrong way can damage the value of your business, Remias says.

 

Sellers

Time your transactions and keep price expectations realistic

If you’re thinking about selling, timing a transaction isn’t easy. Wade Kozich, senior adviser with boutique investment bank Footprint Capital and head of Transaction Advisory Services at GBQ Partners LLC, recommends sellers look at three things to make informed decision.

  • Where are you personally? Are you 40, 50, 60 or 70 years old? Are you burned out? Are you invigorated?
  • Where is the company is in its cycle? Is it on its way up, or down? You don’t want to sell on the way down.
  • Where is the M&A market? Right now, it favors sellers.

Rob Ouellette, partner at Ice Miller LLC, says many industries find it difficult to grow organically, so acquisitions are the only option. This puts sellers in the driver’s seat — for now.

“It’s the most attractive seller’s market in a decade, and things aren’t likely to continue this rosy. So, if you might be thinking about selling in the next few years, it’s probably time to accelerate that thinking,” Ouellette says.

That doesn’t mean sellers can skate through the due diligence process, though. If the financials or operations aren’t in order — and buyers realize they can’t scale or maximize value — a seller may have to take the company off the market and clean things up over 12 to 18 months, Ouellette says.

He’s also noticed more business owners open to keeping a minority stake. It’s not all or nothing anymore, if they believe in the business.

“The multiples are high enough and the money is attractive enough that you can take enough money from the sale of your business to do what you want to do in life, but still keep a piece of it,” he says. “Many business owners find that attractive, to keep their hands in.”

The negotiating leverage of well-run businesses is at its zenith, Ouellette says. With plenty of money looking for transactions, prepared executives can get a premium for their business.

However, he cautions that a good price for one industry and one business may not apply to you.

“If somebody hears that somebody sold their business for 20x EBIDTA, they automatically think their business is worth the same. Human nature ignores the transactions that are done at 7x or 8x,” Ouellette says. “You want to hear the highest and best price, whether or not that applies to your business.”

Mark Kovacevich, president of North American operations for Improving, has seen something similar in this overheated seller’s market. The tech space’s average multiple is 11x, but that’s driven by blockchain organizations that get 40x, or artificial intelligence startups that get 30x.

“If it’s a $10 million or $15 million firm with a single location. It doesn’t have strategic significance to merit that 10x or 11x. It’s just a single location, serving a single market, usually in just a segment of services. It doesn’t have strategic importance to the overall market,” he says. “I think expectations start to get out of line when they hear the average tech company is going for X above multiple.”