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How to prepare for a successful M&A outcome

Ira Kaplan

December 12, 2018

By: Ira Kaplan

When you have the right team in place to make a deal, everything else tends to work itself out.

You can rely on professionals who have experience bringing deals to market and fashioning successful outcomes. You have the right counsel and the right investment banker who can effectively communicate existing opportunities to the buyer. A good team will help you craft a growth story going forward, and assess what costs you can take out and what synergies you can gain. The process of selling is partly the objective metrics of the historic business and partly telling the go-forward story. This can help you think about the buyers you want to approach — likely a combination of strategic buyers and financial buyers (private equity funds and perhaps family offices).

The right preparation will go a long way toward creating a successful M&A outcome. Buyers will engage financial and other advisers to do a deep dive into the business. Their diligence will likely include having their accountants do a quality of earnings (Q of E) report to verify the seller’s historic performance and to question any costs that the seller believes should be added back to historic earnings. These “add-backs” are important in enhancing the purchase price, as each dollar agreed to will result in a multiple in terms of purchase price. In most cases, it makes sense for sellers to commission their own Q of E report. They can use this to anticipate where potential buyers may push back and to determine what should fairly be added back to earnings to derive the purchase price.

Think ahead

Based on the nature of the business, sellers should try to anticipate what other diligence issues will be most relevant to a buyer and work to address them before going to market. For example, if the company is a manufacturer and may have environmental issues, consider having an expert report address those issues in advance. This type of pre-planning will tell potential buyers that the seller is prepared and organized, which will bring comfort, promote trust and speed along the process.

A qualified seller team will typically go to market in a way that communicates to potential buyers what’s important to them in terms of both structure and material deal terms. Consider the following in advance:

  • What structure results in the optimal tax outcome for the seller?
  • Is there a cost to a buyer of that structure?
  • Also, is the likely buyer a financial buyer who wants the seller to reinvest or roll over equity into the transaction? If so, determine what the seller’s appetite is to do so, and how to do it on a tax-deferred basis.
Examine risk

What post-closing indemnification risk are you (as a seller) willing to retain? The current market for meaningfully sized transactions frequently involves having the buyer procure representation and warranty insurance that dramatically reduces the seller’s risk post-closing. This cost is typically shared by the buyer and seller and is around 3-3.5 percent of the amount insured, which is negotiated, but frequently 10 percent of the purchase price. Buyers not willing to use this insurance are at a disadvantage in competitively marketed deals.

After interested parties place their bids for the business, the seller team will narrow which are acceptable based on price, the certainty of closing and other factors that may be specific to certain sellers (such as treatment of employees by potential buyers). Next, the seller will conduct meetings (management presentations) for this group of likely buyers to tell the story of the business and share the vision. It’s important to decide who will be doing this for the selling business. If the business is led by the founder, for example, showing the depth of management beyond the founder can enhance value.

Be crisp and well-rehearsed when telling the story. Although some buyers come to the table with their own management team, most financial buyers invest in people, as well.

Finalize terms

After this stage, potential buyers will submit final bids and the seller team will select a winning bid. Frequently, the bid process will include a seller-prepared draft purchase agreement that puts its best deal structure forward and sets the stage for advisers to negotiate the final terms. Experienced counsel on both sides will facilitate this process.

In short, the right team and the right story told in an optimal way creates an environment that enables the best deal for both the buyer and seller. Careful planning at the outset is critical to create fair expectations for the seller and drive a desirable outcome.

Ira Kaplan is executive chairman and former managing partner of the Cleveland-based law firm of Benesch, Friedlander, Coplan & Aronoff LLP. His practice focuses on M&A as well as public and private debt and equity financing.

 

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