Entrepreneurs and business owners each have a unique way of viewing the world.
Those variances are what make it exciting and stressful, exhilarating and exhausting. The passion to broker a deal and create a new opportunity for business growth is what drives dealmakers to actively pursue what they hope will be the next great deal.
Here’s a look at the world of mergers and acquisitions from some of Pittsburgh’s top dealmakers:
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When it comes to your business, it’s often difficult to take an objective view of its worth. Entrepreneurs and business owners just don’t always understand how an investor evaluates a business, says John Lewis II, founding member of Metz Lewis Brodman Must O’Keefe LLC. They’re involved in their optimistic view of their companies and don’t realize investors are looking at the investment in a more professional, realistic way.
Bob Petrini, president of Chick Machine Co. LLC, who has been a banker, CPA, CFO and operational leader, has had a similar experience.
“Many entrepreneurs misunderstand value and see it as a discrete number, rather than falling within a reasonable range, and often base their expectations on what they need to support their retirement versus what the business is worth without them,” Petrini says.
It’s also hard to stay objective and detached, which M&A necessitates.
Whether buying or selling, you have to avoid becoming emotionally committed so you can walk away from a bad deal, says Jeffrey A. Ford, a partner at Grossman Yanak & Ford LLP.
Value is based upon how the asset will be used, says Mike Denove, a partner in EY’s Pittsburgh office.
“Don’t be afraid to leverage experts who can help you expand the buyer universe exponentially because they see the adjacencies that have become so popular in today’s market,” he says.
Just like when selling a home, it’s important to clean, repair and prepare for a sale. Sellers should perform due diligence to understand how potential buyers will scrutinize and challenge the business. They need to establish strong positions that support their views of the business and mitigate the risks.
Peter J. Lieberman, a partner at Schneider Downs Corporate Finance LP, has found entrepreneurs and family businesses tend to underestimate the importance of building infrastructure that can generate clean information in an M&A process.
“Being in a position to provide complete, accurate diligence information to buyers when first requested builds trust and credibility,” he says. “Alternatively, constantly tweaking information, taking excessive time to provide data and showing up with surprises often damages credibility more materially than the straight financial impact of any particular negative disclosure.”
Business owners should also never do a sale alone.
“There’s no way for an owner to provide their full attention to the business while running the process of selling it. Something has to give, and it is usually the underlying performance of the company,” Lieberman says.
In addition, if you think it’s too early to start planning for business succession — whether that’s a sale, transfer, outside investment, etc. — you may end up being too late, says John T. Welsh, vice president of wealth strategy at BNY Mellon Wealth Management.
“While the succession planning never stops when transferring or selling a business, trying to do so in the most tax-efficient manner has a definite sweet spot,” he says.
Building trust; seeing clearly
M&A requires trust between investors and business owners. For example, Howard W. “Hoddy” Hanna III, chairman at Hanna
Holdings Inc. and Howard Hanna Real Estate Services, uses his lenders as allies before a transaction, even if the company isn’t borrowing from them.
“We’ve actually backed off of investments we were going to make before, on their advice,” he says.
There is a misconception that investors are in it for a quick return, Denove says. As such, entrepreneurs sometimes miss out on opportunities or critical timing.
“While investors do want to maximize returns, investors often search for the investment that matches an interest of theirs, or a capability or an expertise that they feel can bring value to the go-forward proposition,” he says.
Deals are more successful when an entrepreneur gets to a trust stage faster, Denove says, which may mean reframing both of their viewpoints.
Often, business owners fear that investors don’t have the best interest of the business’s long-term success in mind, will look for ways to throw them out as soon as possible after a transaction, or won’t treat employees well, says John F. Herubin, managing director at EdgePoint. But, in many instances, the investor wants a partner with an opinion.
Stephen J. Gurgovits Jr., managing partner of Tecum Capital, echoes that sentiment: “Taking on an investor is really the beginning of a new partnership and it is important that not only do the economics work, but so does the cultural and strategic fit.”
Lauren Townsend, principal and founder of Balcony Advisors, runs across those same fears — private equity firms are slick and greedy, investors haven’t walked in the entrepreneur’s shoes and the investor group will cut costs and not reinvest in the business in an effort to pay down debt.
Making assumptions goes both ways, however. Townsend says investors tend to underestimate the value of a business owner’s involvement. They risk losing years of institutional know-how and commercial relationships if the owner walks out the door.
Another fallacy relates to large, institutional acquirers. Lieberman says they can underestimate the emotional challenge that selling presents to entrepreneurs and multi-generational family business owners, and fail to appreciate the importance of non-financial deal terms.
“Often, buyers who are accustomed to acquiring businesses from private equity firms and corporate owners aren’t prepared and aren’t willing to invest the time and attention that entrepreneurs need to get comfortable that their ‘baby’ or their family’s legacy will be well-taken care of after the closing,” he says.
Pete DeComo, chairman and CEO of ALung Technologies Inc., has experience raising capital and developing startups. He realizes deals must be mutually beneficial; otherwise a one-sided deal has the potential to eventually implode.
The entrepreneur is also willing to walk away, understands his fixed, variable and hidden costs, and defines and agrees on the selling price and margin targets before going to the negotiating table. DeComo knows the bottom limit beyond which he will not go when negotiating.
Align and integrate
Even when a relationship is developed and the deal makes sense, cultures that don’t align still cause transactions to fall through. If these problems arise after a deal closes, they can slow or stop integration efforts.
“Merging is easy, but successful integration is challenging, particularly if multiple cultures are involved,” says Francis A. Muracca II, partner at Jones Day.
You have to develop a solid integration plan that incorporates the views of the key people you wish to retain to ensure a smooth transition, he says.
Lewis says both parties need to evaluate pay structures, benefits, seniority classifications and all other aspects that will affect the employees being integrated to identify potential misalignment.
And don’t expect to suddenly become a combined business that can operate cohesively. Even the most amicable deal partners take time to mesh.
“Appreciate that you can’t coach culture and you shouldn’t expect the other side to change,” Denove says. “So, look for that match upfront.”
The biggest mistake Howard Hanna has made came from not understanding the business it was buying or the culture of the people.
“When this has happened in the past, it makes it difficult to manage and run the business. When you don’t have a good grasp of the business or have a culture that doesn’t relate well, it makes a huge learning curve for everyone,” Hanna says.
However, Ford cautions that the importance of culture often depends on the industry. Sometimes it’s critical; in other situations, not so much.
Kristy Knichel, president, CEO and owner of Knichel Logistics, knows firsthand the importance of understanding what a deal entails and then considering how the deal will impact personnel. Will it create more work that they may find difficult to manage? Will it impact morale?
After one acquisition, Knichel says two employees who had been with the acquired company for decades were given different roles. It ended up leading to significant frustration on all sides. Sometimes, it’s necessary to change; other times, it’s more productive to leave things as they are.
Arnie Burchianti, founder and CEO of Graham Healthcare Group, which started as Celtic Healthcare until a 2016 merger with Residential Healthcare, has successfully led the company through significant periods of growth, including a joint venture with Allegheny Health Network.
He once changed what was “sacred” in a business he acquired. As a result, he says avoiding that misstep has become part of his operating model.
Burchianti also follows a thorough due diligence process, sensitizes financial forecasts and models, and remembers that culture and employee engagement are key to success.
Townsend likes to encourage collaboration early. She rolls out integration projects with champions from each location/organization and ensures the integration teams receive monetary incentives and company-wide recognition for certain milestones.
While fair and equitable pay practices are important for a good culture, money isn’t everything, she says.
“Employee upward mobility is key, along with PTO, volunteer opportunities and feeling fulfilled in your role. This last one is the toughest to get right,” Townsend says.
Also, in a leveraged buyout, the investment firm needs to set expectations of the management team, pre-close, in terms of frequency of communication, board and budgeting requirements and annual management fees.
“I’m a fan of a lengthy sale process because you get to see how an investment firm behaves through the ups and downs of the process,” she says. “It will give you insight into their communication style going forward.”
When asked what makes a business deal one that leads to substantial profit, Herubin’s first words were: people, people and people.
His biggest M&A mistake came from not fully appreciating the personalities and motivating factors of the employees and key management that remained post-transaction.
“The ‘numbers’ or qualitative analysis looked great, but there was a delicate balance of personalities that the prior owner navigated and understood better than we did. Several key employees left, which negatively impacted the business until we were able to align our strategy with the existing team and culture,” Herubin says.