Smart Business Aspire Conference: A day for dealmakers

There’s no doubt about it — Northeast Ohio is a dealmaking town. Tracing its roots back to the days of John D. Rockefeller, the region’s legacy of big industry, banking and venture capital continues to this day.

In a nod to the past — and as we look forward to the future — on May 18, 2016, Smart Business will present the inaugural ASPIRE Conference in Cleveland, Ohio. We’ll bring together entrepreneurs, business owners, and top leaders with deal-makers, investors and advisers for a daylong conference to discuss issues in the M&A and business investment world. Together, we’ll aspire to make Northeast Ohio a stronger business region.

Smart-Business-Aspire-Conference-2016

The Cleveland ASPIRE Conference features keynote presentations from successful entrepreneur Nicholas Howley, founder and CEO of TransDigm, and savvy financial business leader Walter Bettinger, president and CEO of Charles Schwab. Both will share lessons learned.

This will be a different kind conference than Northeast Ohio has previously seen as the entire dealmaking community has come together to bring ASPIRE to life. It will present exciting keynote speakers, informative breakout sessions, and opportunities throughout the day to network while focusing on four key areas that any entrepreneur thinking about jumping into the M&A or dealmaking world needs to understand:

  • Buying a business: Do you know what it takes to effectively buy a business? Have you thought about valuations, the importance of a strong management team, and why market share and competitive differentiation matters? You’ll hear from experts and business leaders who have grown through acquisition.
  • Selling a business: When is a good time to sell? Do you understand how private equity values your business? Have you made those critical checklists of what to prepare? You’ll learn from entrepreneurs who have divested assets or sold their company and the experts who have helped them.
  • Raising capital: Where does the money come from? We’ll discuss ways to finance your business — from friends and family to angel investors and early-round finance, we’ll explore options such as bank financing, venture capital and private equity. You’ll hear from those who have raised capital and others who have provided it.
  • Liquidity events: What happens once you’ve taken money off the table? We’ll dive deep into the subject and discuss how to spark these all-important events, plus what comes next after the deal is done.

Join us at the ASPIRE Conference. Learn more or register for the May 18 event today at www.regonline.com/aspire2016.

How to take advantage of the accelerating M&A market

As the M&A market for small businesses continues to recover after the recession, now is the time for potential sellers to begin planning. After all, business owners who sell their business without a well-defined exit plan typically sell for too little.

“To maximize value, minimize cost and make for an efficient sale, the business owner must seriously review legal, financial and business operations before going to market,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “Your lawyer, accountant and/or a good business consultant can help with this evaluation.”

Smart Business spoke with Smith about the M&A market and how to create an effective exit plan strategy.

What are some indicators that the M&A market is heating up?

BizBuySell.com reports that sales of small businesses have for the first time reached pre-recession levels. We’ve seen this in our own practice as well with increased deal flow and increased multiples.

What is driving the increase?

A variety of factors: improving small business performance, increased capital availability, more add-on acquisitions for venture capital portfolio companies, more sellers who waited out the post-recession recovery in order to regain lost value, and more buyers willing to take on debt and risk to grow.

Currently, there are many potential sellers in the market with viable businesses. Many restructured during the recession, so expenses were reduced and their EBITDA and profits have now increased. At the same time, banks have relaxed underwriting criteria and are more willing to finance buyers who are interested in making strategic acquisitions. Finally, there is a lot of pent-up demand, both among small businesses that see acquisition as a way to grow, and venture capital firms that are looking to expand their holdings through add-on acquisitions that provide synergy with their existing portfolio.

According to a BizBuySell.com survey of brokers, the strong M&A market is expected to continue throughout 2014 and we see nothing on the horizon that should cause a decline in deal activity.

What should potential sellers be thinking about in this market?

They should be thinking about exit planning — How can I position my business for maximum value and a clean, quick sale? They should be reviewing their entire company from the perspective of a buyer. This is not how most business people usually view their companies.

What are some examples of things to consider when exit planning?

Among other things, the business owner should ask:

  • Are financial systems and controls in place and adequate? Are financial statements presentable and in accordance with standard accounting principles? The business owner should consider having the financial statements reviewed or audited, if they are not already.
  • Can the business owner identify the best ways to increase EBIDTA? This is the biggest driver of value in your business.
  • Are employment agreements in place for key employees? Do all sales employees have non-competes?
  • Do key customers and vendors have contracts? Is there any guarantee of recurring revenue?
  • Does the business have title to all of its assets? Can it prove this in writing?
  • Does the company have title to all of its intellectual property? Without contracts, this is unclear.
  • Are all key contracts assignable? The business owner should know who can hold up their deal.
  • Is the business qualified in all states in which it does business? Has it filed tax returns in all of the appropriate states?

How far in advance of an anticipated sale should exit planning occur?

The longer the lead time the better. Planning should occur at least a year in advance of going to market. Ideally, it would be two to three years before a sale as it’s important to have the financial statements and tax returns in place as part of due diligence.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

How to minimize the risk in M&A transactions

David E. Shaffer, director, Audit & Accounting, Kreischer Miller

David E. Shaffer, director, Audit & Accounting, Kreischer Miller

Companies spend more than $2 trillion on acquisitions every year, according to an article in Harvard Business Review. Yet studies frequently cite failure rates of mergers and acquisitions (M&A) between 70 and 90 percent.

David E. Shaffer, a director in the Audit & Accounting practice at Kreischer Miller, says problems are often the result of poor planning. Companies are enticed by the opportunity to create synergies or boost performance and fail to consider all ramifications of an acquisition.

Smart Business spoke with Shaffer about ways to mitigate the risk and ensure a successful transaction.

Why is the M&A failure rate so high?

Many companies don’t establish a clear business strategy for mergers and acquisitions. Some questions that need to be answered include:

  • What are the goals of the merger or acquisition?
  • Do you want to leverage existing resources or create a new business unit?
  • What is the maximum price you are willing to pay?
  • Must the seller agree to some holdback of the price?
  • What happens to administrative functions and management of the target company?
  • Must key employees sign agreements to stay?
  • Will you negotiate between an asset purchase and a stock purchase?
  • Is culture important?

You should be proactive in identifying candidates for acquisition. Companies that have done many acquisitions tend to ignore requests for proposals because the sellers in such situations usually go with the highest price. They reason that the law of averages is against them and at least one competitor will overpay.

Instead, companies involved in many acquisitions prefer to target entities and establish a relationship before that stage in order to avoid a bidding war.

How should the due diligence process be conducted?

It’s important that you don’t take shortcuts in your due diligence. Hire professionals who are knowledgeable about the industry; they can negotiate better deals for you because they are not emotionally attached and can push harder for seller concessions.

Due diligence should address internal and external factors that create risk in the acquisition and focus on key factors driving profitability — employees, processes, patents, etc.

The more risk present, the more you should ask for holdback in the selling price. For instance, if much of the profit is derived from a few contracts, require that the contracts be renewed under similar terms if the seller is to receive the full purchase price.

M&A failures often result because buyers concentrate too much on cost synergies and lose focus on retaining and/or creating revenue. Client retention at service organizations is at significant risk following a merger or acquisition, according to a 2008 article from McKinsey & Company. Clients will receive misinformation, so it’s important that the acquiring firm step in quickly to assure clients that service levels will equal or exceed what they have been accustomed to expect.

What needs to be done post-acquisition?

It’s important to have a clear post-acquisition plan, including financial goals, with as much detail as possible. The quicker value is created by the acquisition, the better the result for the buyer.

Key post-acquisition steps to ensure a successful integration include:

  • Developing the organizational structure.
  • Developing sales expectations.
  • Identifying what processes and systems will change, and when.
  • Developing performance measures.

Finally, you also need to hold key management responsible for producing results.

David E. Shaffer is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected]

Social Media: To keep in touch with Kreischer Miller, find us on Twitter: @KreischerMiller.

Insights Accounting & Consulting is brought to you by Kreischer Miller

 

Business Pulse: Domestic M&A value swells

Aggregate value of domestic M&A transactions continues to swell despite a reduced number of announced deals, with dollars committed in May surpassing last year’s pace, supported by several billion-dollar-plus strategic buys.

Strategic buyers are actively pursuing acquisitions, incentivized by a slow organic growth environment and abundant cash reserves. S&P 500 companies are sitting on $1.7 trillion in cash and need to put money to work in higher earning assets. Competition for quality acquisition opportunities remains fierce, with industry buyers showing an increased willingness to pay premium valuations for growth and quantifiable synergies.

May highlights support a healthy strategic buyer appetite:

A. Schulman Inc. announced it was acquiring Akron-based Network Polymers Inc., a niche compounder of thermoplastic resins and alloys, bringing complementary business in specialty engineered plastics ABS and ASA. The deal is expected to strengthen its U.S. market presence by increasing penetration in key end markets such as building and construction, agricultural products and lawn and garden, as well as expand its distribution business. Schulman intends to continue an aggressive bolt-on acquisition strategy in its specialty plastics business, as well as other opportunities for transformational acquisitions.

The Timken Co. acquired Standard Machine Ltd., its fifth acquisition in 2013. The Saskatoon, Saskatchewan, Canada-based company provides new gearboxes, gearbox service and repair, open gearing, large fabrication, machining, and field technical services to the mining, oil and gas, and pulp and paper markets. The acquisition will expand Timken’s industrial services capabilities.

TransDigm Group Inc. announced it was acquiring Arkwin Industries Inc., a Westbury, New York-based manufacturer of hydraulic and fuel system components for commercial and military aircraft, helicopters and other specialty applications. Arkwin is TransDigm’s second acquisition this year, following Aerosonic Corp. in April, a Clearwater, Florida-based manufacturer of proprietary air data sensing, test and display components for use primarily in the business jet, helicopter and military markets. Both transactions were completed in June.

PolyOne Corp. completed the sale of its vinyl dispersion, blending and suspension resin assets to Mexichem SAB de CV. Assets acquired include manufacturing plants in Pedricktown, New Jersey; Henry, Illinois; and a resin research facility in Avon Lake, Ohio.

 

Deal of the Month

Its second major strategic partnership in the last four months, Cincinnati’s Catholic Health Partners announced an agreement with Kaiser Permanente of Ohio to acquire its existing health plan, medical group practice and care delivery operations in Northeast Ohio, which services more than 80,000 members. The transaction follows CHP’s February purchase of a minority ownership stake in Akron’s Summa Health System Inc., one of the largest integrated health care delivery systems in Ohio.

CHP is the largest health system in Ohio, serving the metropolitan markets of Cincinnati, Toledo, Youngstown, Lima, Lorain, Springfield, and Tiffin. Through its integrated health care delivery network, comprised of hospitals, long-term care facilities, home health agencies, wellness centers, and hospice programs, the company is estimated to service 38 percent of Ohio’s residents throughout 28 counties.

 

Andrew Petryk is managing director and principal of Brown Gibbons Lang & Co. LLC, an investment bank serving the middle market. Contact him at (216) 920-6613 or [email protected]

How to prevent deal-breaking mistakes when selling your business

Brian Reed, partner, Transaction Advisory Services, Weaver

Brian Reed, partner, Transaction Advisory Services, Weaver

Selling a business is challenging. From vetting potential buyers to preparing financial statements to keeping negotiations on track — all while running your company — there’s a lot that can go wrong. In fact, almost no detail is too big or too small to affect the eventual outcome of merger and acquisition (M&A) deals. However, you can reduce the odds of a mistake by knowing where similar transactions have gone astray.

“It’s important to talk to owners who have successfully completed sale transactions and to work with experienced M&A advisers,” says Brian Reed, partner in Transaction Advisory Services at Weaver.

Smart Business spoke with Reed about common M&A mistakes and key items to resolve before closing a deal.

How might sellers hurt their chances before putting their business on the market?

You risk a letdown when you make overly optimistic future earnings projections or put too much weight on variable measurements, such as the sale prices of similar companies in stronger M&A markets. If you won’t budge from an unrealistic sale price, you could drive away an appealing buyer.

Work with a professional adviser to assess your company’s value as well as estimate an offering price the market can support. The two may not match because the price depends on contemporary economic, M&A market and sector conditions.

Where does timing factor into this?

Other critical seller mistakes revolve around timing, whether internal or external. For example, selling at the wrong time, at the end of a market cycle, could mean fewer buyers and possibly lower offers. If your sector has experienced a recent wave of M&A deals, the buyer base could be depleted, and you may want to hold off.

Sometimes sales are spurred by internal circumstances, such as the retirement of a founding owner, but these situations shouldn’t rush the sale. If your company is not ready for the market, consider appointing an interim head to make preparations and screen potential buyers.

Sellers, particularly those selling for the first time, often greatly underestimate the amount of work and hours it takes to prepare for sale. Have you allocated enough time to implement strategies to maximize your sale’s value? Is your company ready to promptly and accurately respond to hundreds of specific buyer requests? If you haven’t assembled a team with the time and resources to handle these requests, it could bring your potential deal to a standstill and deter otherwise interested buyers.

How might housekeeping impact deals?

Housekeeping issues aren’t trivial. They include essential tasks such as ensuring that contracts and legal obligations are in order. Some items that can trip companies up are:
• Poor accounting. If your financial statements and records are not properly organized and presented, it reflects poorly on your management, and the due diligence process will likely take longer. Sloppy accounting errors could mean tax or legal issues after the deal closes.
• Neglecting key players. Buyers want to know that key employees will stay onboard once the sale is completed. Make sure your top performers are offered financial and other incentives to stay.
• Locking in contracts. Don’t renew an expensive vendor contract as you’re about to transfer ownership. Buyers don’t like long-term contracts they didn’t negotiate, particularly if they’ll be penalized for breaking them. Negotiate short-term contracts or push for favorable terms.

What are some common loose ends to watch for and resolve?

Leaving loose ends hanging won’t endear you to your buyer, as they could hinder integration and future profitability. Some common unresolved internal issues involve:
• Minority interests. Buying out minority investors or shareholders before a sale means the buyer won’t need to deal with their demands later.
• Employee controversies. An integration team doesn’t want to deal with open legal issues, for example, while trying to build a new culture.
• Copyright confusion. Make sure all patents, copyrights, trademarks and other intellectual property holdings are in order. If you’ve failed to verify and document ownership, you may risk the deal’s value.

Brian Reed is a partner in Transaction Advisory Services at Weaver. Reach him at (972) 448-6936 or [email protected]

Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.

Insights Accounting is brought to you by Weaver

Diligence required to improve company value

Scott L. Fields, Partner, Houston office, BKD, LLP

Recovery continues to be slower than most businesses would prefer. Part of the slow growth is due to concern from many business owners regarding whether they can trust some of the leading economic indicators released in the past few months.

On a positive note, recent trends have shown that unemployment is being reduced overall. The National Association of Manufacturers also reported that more than 31,000 new U.S. manufacturing jobs were created in February. This increase, however, is tempered with the belief that many unemployed individuals have simply given up on job searches, as they have now been out of work for an extended period. The end of their search effort causes many to fall off of the tracked statistics. This may be causing some lower-than-actual unemployment numbers to be reported. In addition, a recent University of Michigan study showed consumer confidence figures have fallen slightly due to weakening perceptions about the economic environment.

Two other areas facing business owners have caused them to move at a slower pace when considering expansion, acquisitions and hiring of additional employees. These two areas are taxes and the looming health care changes. With the potential for higher taxes and higher health care costs on the horizon, many entrepreneurs are taking a wait-and-see approach. Thus, the reports of companies continuing to pay down third-party debt and stockpile cash still exist.

It seems businesses have returned to profitability as a result of their concentrated efforts implemented to endure the economic downturn. The threat of losses, liquidity issues and, in some cases, covenant violations forced many businesses to lean up operations, challenge spending and do more with less. As a result, many are producing more with fewer resources and have improved their processes. Earnings levels have improved, but most results are still below the levels experienced in the mid-2000s.

Also of concern is uncertainty in foreign markets. While we have had a credit and debt crisis here, overseas trouble has many business owners contemplating international business relationships and opportunities. In the mid-2000s, many production jobs were moved overseas to benefit from inexpensive labor. With the current domestic economic conditions and the lack of stability driven by the uncertainties in the Eurozone, there are rumblings that U.S. companies may work to grow domestic manufacturing and pull jobs back to the U.S. Innovations also are occurring in certain niche areas, and the shrinking cost advantage of outsourcing production is becoming more evident. Job growth continues to be a major focus domestically, and labor negotiations of major industries, such as auto makers, have demonstrated the desire for large companies to guarantee sustainability and promise to keep jobs in the U.S.

There is also concern regarding the stability of the buying power of foreign markets. U.S. companies have continued to expand their penetration into foreign developing markets. The ultimate results of the various national debt issues in the Eurozone could create an economic ripple effect that could affect demand for U.S. products in many foreign markets. Also, the continued political changes and instability in eastern countries can create swings in energy prices and product demand in those markets. This creates difficulty in planning for growth and expansion — and correspondingly a fair amount of caution when it comes to the timing of capital investment and business expansion.

Merger & Acquisition Activity

While the aforementioned factors have slowed down private business owner activity related to expansion and acquisitions, another business segment seems to have picked up. Private equity groups and private investors have been much more active in recent months. There has been significant public discussion in the past 18 months regarding cash that is on the “sidelines” waiting to be invested. We have seen that as the economy begins to expand and smooth out, more M&A deals are being contemplated. Also, business valuations are returning to more normal and expected levels driven by those wishing to market their businesses, and banks are becoming more willing and involved in financing such deals. We view this as an encouraging sign and an indication of continued movement in the right direction.

Business Succession

Each business faces unique challenges, but all ultimately need to consider, plan for and execute a succession plan. Whether the plan involves selling the company to an unrelated third party, transitioning or selling the company to the next generation, an ESOP or some combination of these, this issue has to be addressed. The recent increase in merger and acquisition activity has been driven in a number of cases by exit strategies employed by many business owners. As the baby boomers continue to exit the workforce and leave their businesses, we will see more and more movement and opportunity in this M&A wave. When these decisions are made and the process starts, planning can have a significant effect on the company’s valuation and the ultimate profit realized by the owner. This truly is one of those areas where “an ounce of prevention (of negative results) is worth a pound of cure.”

Here are a few planning ideas that can be game changers when an owner is looking to improve value:

  • Perform due diligence on your business and your business processes and activities. Many sellers believe the diligence process is the buyer’s responsibility. While buyers will spend a great deal of time and effort on due diligence, performing self due diligence can overcome a number of surprises, allow the seller time to position its operations and activities to provide the greatest advantage and better prepare the seller for questions asked during the process. Being prepared when soliciting bidders also will likely increase the number of bidders you may be able to attract.During this process, you should consider reverse due diligence, or preparing the data that will likely be requested during the due diligence process. These are standard documents requested in most diligence engagements. Having this information ready on the front end adds value and helps move the process along. Delays in outside or third-party diligence have been proven to affect deal values.Also, have your company’s financial statements audited by a firm that potential buyers consider reputable. Audited financial statements provide immediate credibility.
  • Make sure you impress upon buyers the value of the company you are offering to them. Build a business case for why the company will continue to prosper and grow and what positive effects the existing infrastructure will have on such growth.
  • Document agreements with employees and third parties. It is important for buyers to mitigate the unknowns when buying a business, so the more documentation for contractual arrangements, the better.
  • Be proactive relative to unresolved or potential litigation. Review pending or threatened claims with your attorneys and be honest about what situations exist. Resolve issues as diligently as possible. Make sure to include all potential human resources issues that may exist.
  • Avoid accounting discrepancies, unusual transactions and changes in reporting methods. An audit, as discussed above, can assist with this. However, remember that any such instances will need to be explained and will be challenged by a buyer. Clouding facts will lead to more questions and may ultimately impact the value of your deal.

When it comes to the value of your company, you can never be too diligent. For more ideas on how to enhance value, contact a BKD advisor.

Scott L. Fields is a partner at the Houston office of BKD, LLP. Reach him at [email protected]

Article reprinted with permission from BKD, LLP, www.bkd.com.  All rights reserved.

Strategies to ensure a successful acquisition and integration

Francois Laugier, Partner and Director, Ropers Majeski Kohn & Bentley PC

When a company decides to expand or enhance its core activities, sometimes a strategic decision is made to acquire another organization that offers the team, the technology or the assets needed to achieve its goals. From a buying company’s perspective, there are three main focal points of an acquisition process in order for the purchase to be successful: strategy, integration and acceleration.

“The strategy needs to be determined early and shared widely and quickly,” explains Francois Laugier, partner and director at Ropers Majeski Kohn & Bentley PC. “Integration is almost equally as important as strategy; because  integration is really about capturing the long-term benefits of an acquisition.”

Speed in execution is also of the utmost importance. “You get the chance to effect change in an organization that you’ve acquired during the first 100 days of the acquisition. There is a tempo to an acquisition, and it is incumbent on the buyer to make sure that it keeps beating the drum and moving people along quickly.”

Smart Business spoke with Laugier to determine a road map for successfully acquiring a business to enhance core activities and products.

What can a company do to prepare for the acquisition process?

The buying company needs to know precisely why it desires to purchase another organization, and that strategy needs to be communicated throughout the core management team that will be involved in the process. Early on, lawyers, investment bankers and consultants need to be involved, because most of the aspects of the acquisition are negotiated in the initial stages.

Nearly 60 percent of the failed acquisitions are failed integrations, not failed negotiations. A team specifically dedicated to integration should be assembled the minute discussions start with a prospective party. This team must ensure that the new assets and employees of the target corporation are quickly and efficiently integrated into operations.

What steps are involved in an acquisition?

At the outset, a buyer must decide whether it will be purchasing assets or stock. If the company being acquired has significant liabilities or unknown liabilities, buying the assets of the company provides flexibility. However, when buying assets, there are a number of transfers that need to take place for the target company to be functional inside of the acquiring company, such as intellectual property rights or foreign employee visas. The alternative choice is to purchase the stock of the company. A big advantage of a stock purchase is the predictability of the process, because domestically or abroad, the acquisition of the stock of a company is often similar. The drawback is that a business may be unintentionally taking on liabilities.

Next, a letter of intent is drafted, where an outline of the terms of an acquisition is determined. Although legally not binding, once there is a handshake on a letter of intent, it is very difficult to later change its terms. For this reason, it is imperative to involve advisers early to draft terms. The due diligence period comes after the letter of intent. The target company completes a legal due diligence checklist and provides the buyer the documents and information requested, thereby reducing the odds that major issues will go unnoticed. The disclosures cover four major areas:: corporate structure,  intellectual property, human resources and tax.

Negotiations of the definitive agreements take place next. The secret to success for negotiations is to move quickly and to keep exchanging redlines of the documents without a lag. The acquisition team needs to work closely together so that all of the fact-finding that took place in the due diligence process gets integrated into the agreements, minimizing risks and maximizing the long-term benefits of the acquisition.

Once a deal is closed, how can a company successfully integrate the target company’s assets?

Integration is really about assimilating the intellectual property and the assets, but, most importantly, the employees of the target corporation. Integration is the true key to success. The first place to start is to roll out the red carpet for the employees of the target, give them an employment agreement, give them equity in the new corporation if you can and honor the benefits that they had in the target company, basically providing them with incentive to do well. An individual should be designated in the buyer’s team to lead the integration and successfully capture the benefits of the acquisition. As soon as the deal closes, the buyer should explain all the synergy and benefits to everyone, including customers, suppliers, the new employees (most essentially) and existing employees. It’s important to understand the culture of the company being acquired and combine it successfully with the culture of the buying company.

The most complex factor is often integrating the information technology systems. Obviously, the legal compliance and the accounting processes need to be integrated as well. The lines of products and services must be considered so that there is no overlap or redundancy. The message that is communicated to the world — all of the marketing, sales, human resources, etc. — need to be integrated after the closing of the deal.

Achieving long-term success is a result of learning about and blending the two companies as successfully as possible. Next is managing an organization that has grown in head count, in lines of products, assets and people, and that may come as a big change. After that, it is time to embrace new resources and reach a new level of success.

Francois Laugier is a partner and director with Ropers Majeski Kohn & Bentley PC. Reach him at [email protected] or (650) 780-1691.


How HR can be critical in successful cross-border M&A deals

Iain Jones, FFA, Director, International Consulting Group, Towers Watson

The days of rushing into mergers and acquisitions are over. Companies today are doing more due diligence up front, and making a bigger effort to integrate acquired companies, says Iain Jones, FFA, director, International Consulting Group, Towers Watson.

“Business leaders are recognizing that they must allow people more time to do due diligence, and that there shouldn’t be a rush to get due diligence done too quickly,” says Jones. “In the heady deal-saturated times, there was significant competition for targets, but people are realizing that there are consequences to ignoring potential obligations, so they need appropriate due diligence.”

Smart Business spoke with Jones about M&A trends and how HR can play a critical role in the process.

What are the current trends in mergers and acquisitions?

First, not all transactions are closing. There’s more willingness for companies to walk away from deals as they are no longer brushing off risks and saying they’ll deal with them later. Second, smaller deals are dominating. There aren’t as many as multibillion-dollar deals as we used to see. Third, there are quite a few spinoffs, companies shrinking to grow as they take flak in earnings because they’re too diversified. Fourth, there is a growing importance of emerging markets and, finally, global perspective does matter. Companies in the U.S. are acquiring what they thought was a U.S. company, then realizing that, because of the way we’ve globalized, those companies have operations around the world.

What are the challenges of international acquisitions, and how can companies overcome them?

The biggest challenge is that you get into a multitude of cultures, regulations, time zones and languages to deal with, all of which can be exacerbated if you haven’t had operations in those countries before. You have to figure out all the legal pieces and do your due diligence. Get outside support with the skills and global resources to support such deals.

Another reason for bringing in external advisers is that, as you move into multiple countries, one person running the deal simply cannot handle the volume coming at them.

Businesses also need to balance global consistency on certain items with country specificity. That’s where you need advice, someone who can say, ‘Yes, you can apply that across the world,’ or ‘No, there are EU regulations that say you can’t do that.’ It’s important to identify those advisers before you need them, because, once the need arises, you’ll be too busy blocking and tackling the issues that come up to give enough attention to adviser selection.

What role can a company’s HR staff play in an acquisition?

People are the fabric of the deal and HR glues it all together. Deals succeed with long-term integration and people buying into the long-term vision and strategy. Engagement drops in periods of uncertainty during a deal. There’s a clear link between engagement, productivity and business results; to the extent that you can minimize that uncertainty, you can minimize the drop in productivity. That is a key role for HR.

How can business leaders prepare their HR department to take a lead role in a merger or acquisition?

First, HR needs to prepare themselves for deals. Business leaders should train them on the role of M&A in the business and how they can contribute to the deal success from talent, culture and HR functional perspectives. This role needs to be earned though, which is why experienced acquirers invest so much in training HR.

When a deal hits, get them involved from the beginning. Let them in on the change management aspects of the deal. Get them to lay out the long-term vision up front and communicate it to employees. Tell them what’s coming. Changes may not happen immediately but it reassures them that those key issues are being looked at.

Another vital element for the HR side is to work on culture, which is so key in a deal. There are different ways to go with culture but, if HR is allowed to do that assessment, they can advise business leaders on how to approach and integrate the target company in a more effective way, including identifying and focusing on the things that matter most to employees.

How important is it to integrate acquired companies, and how do you begin?

It depends on the business strategy. If you’re looking at a standalone company, you may just take it on as it is. It may be simply a different ownership structure with work as usual.

With a full integration, however, you really need to engage people, welcoming them to the company and explaining what it means to them.

Too often, when a large company acquires a smaller one, there’s insufficient communication and employees of the acquired company are just expected to adapt. That doesn’t just happen — the acquired company has a certain culture and a successful way they are working that you want to capture. Take the time to understand what is working so well at this company.

On day one, let people know your long-term vision and likely timing of the various aspects (e.g. job structures/grading alignment). This communication is vital to minimize that crippling uncertainty. If you leave a gap in knowledge open, people fill in the gaps with potentially false information.

Successful integration may also involve not touching things on the operations side until you have a clearer picture of how they work. There is normally something very powerful in that company and it is the reason you’re buying it. You have to be careful you aren’t killing the goose that’s laying the golden egg.

Iain Jones, FFA, is director of the International Consulting Group at Towers Watson. Reach him at [email protected] or (949) 253-5249.


How to take advantage of the current mergers and acquisitions environment

Patricia A. Gajda, Partner, Brouse McDowell

If your company is considering a merger or acquisition, you may want to consider striking while the iron is hot.

“The current state of the economy has resulted in what is commonly viewed as a ‘buyer’s market’ in M&A,” says Patricia A. Gajda, partner and chair of the Business and Corporate practice group at Brouse McDowell in Cleveland. “This is driving some to enter the acquisition market, before the buyer’s market ends.”

Smart Business spoke with Gajda about the current state of M&A activity and how to take advantage of the situation.

How is the current market impacting the M&A environment?

We have seen an upswing in M&A activity over the past year. This is due to several factors, including a loosening of the credit markets enabling financing, the availability of private equity funds and companies flush with cash. Strategic buyers are out looking for businesses that were hurt by the economic downturn and investment buyers are looking for good investments.

Strategic buyers are focusing on transactions that result in expansion in markets and cost saving synergies from an acquisition. Additionally, because it is a buyer’s market there are good deals and bargains to be found. Companies have cash and the ability to buy after staying out of the market for the past few years. The private equity funds are actively out in certain market segments looking for good fits for their interests and are sitting on large funds of money for investment.

There is definitely an interest in ‘green’ businesses, as well as specialty manufacturing, health care and technology. Other drivers of corporate transactions include specialty services, desirable personnel, a certain technology, know-how or process. Even if a company is not for sale, the company may still be looking to divest subsidiaries, certain assets, divisions or operations.

From a global perspective, I see an increased interest in picking up businesses with a global reach, but the uncertainty in the Euro Zone and China have caused some issues in that regard. There is an uncertainty as to how the overseas economic issues will affect the United States, and this has caused some hesitancies.

How is this affecting the way transactions are structured?

Each transaction is unique and the terms and structure need to be determined for that transaction. Both the buyer and seller must be clear on their criteria for the transaction.  What is the buyer looking to achieve from the transaction? What is the seller trying to gain from the transaction? These questions need to be answered.

At the beginning of the downturn, a number of deals went on hold and took a wait-and-see-approach. Now that there is increased activity, both parties — buyers and sellers — are interested in moving quickly on possible transactions. With the uncertainty in the business climate it is undesirable for potential deals to drag out, if they can be closed quickly.

Sellers want to close and walk away without any further risk to purchase price through any delayed payment mechanism. Buyers on the other hand are able to structure payment on favorable terms including deferred payments. Deferred compensation structures can be used to lessen any valuation gaps, and take away some of the uncertainty to close with less closing conditions. A buyer can use mechanisms such as earn-outs to keep the former owner interested in the business and the transition of the customers and employees. So, I think that one impact of the economy of the past few years is that parties on both sides of transactions have become more focused, results driven and just smarter about their strategic deal making.

What other trends or risks should business owners be aware of?

While most companies will state a preference for organic growth, the current favorable pricing and shorter timelines to reach the desired business plan make acquisitions more favorable. Alternatively, sellers are under pressure to divest non-core businesses or under-performing operations in order to improve the company’s over-all financial performance.

With the uncertainty in the economy at this time, business owners seeking to sell should focus on the strength of the potential buyer and the ability of the buyer to close the transaction. Additionally, a cash purchase price at closing is of course the least risky route to receive full value for the company. Any type of future payment such as through promissory notes, earn outs, or stock grants with the current volatility in the markets and the economy are risky.

A buyer has to fully understand the risks, and avoid the temptation of pursuing a transaction, despite discovered risks and doubts. From the standpoint of a business owner seeking to buy entities, due diligence of the target company is critical. A buyer needs to fully understand what it is buying, and wants to avoid surprises. Additionally, from a buyer’s standpoint the market being a buyer’s market allows for the purchase price to be structured as a mix of cash, equity and debt.

How should they approach things differently?

Companies that have the right resources are relying more on internal support for transactions. But companies should be cautious and make sure they are staffing the transaction with experienced and skilled personnel to achieve the desired outcome in a timely and thoughtful way. Those closest to the particular market should be used in the diligence of the business.

Buyers need to focus on valuation of the target and integration of the businesses and should devote the proper resources and engage the best available third parties to help in those processes.

Patricia A. Gajda is a partner and chair of the Business, Corporate and Securities practice group with Brouse McDowell in Cleveland. She can be reached at (216) 830-6830 or [email protected]


Mergers and acquisitions require careful consideration

Brian JM Quinn, Boston College Law School

If your company is considering a merger or acquisition, do your homework first and make sure the board is in the loop. And while you are at it, bring in outside counsel early enough to avoid problems later.

“Be prepared, particularly if you are a public company,” says Brian JM Quinn, assistant professor of law at Boston College Law School and editor of the M&A Law Prof Blog. “Have a plan with the board so you know what to do in the event that the board or the CEO is approached to be acquired or to take the company private, for example.”

The plan does not need to be detailed, but it at least should contain an idea of what a response should be. Companies sometimes get in trouble when they don’t have plans, and they find themselves making missteps early on.

The board should make instructions clear to the CEO if there is an approach. How much time can a CEO discuss a potential offer with a third party before the board wants to know? To how much can the CEO commit?

“The biggest problem the board’s going to have is just not being in the loop,” Quinn says.

It is possible for a CEO to get approached by a third party, and for whatever reason, the CEO feels it’s not serious ― and will tell the board at its next meeting, which might be in a month.

“That might be too long,” Quinn says. “These are the kinds of things the board can tell the CEO or C-level managers if you get a proposal that’s reasonable or seems like it might be reasonable, we want to know.”

Bringing in outside counsel early enough is especially helpful if your company is new to the process of mergers and acquisitions.

“If you are on the sell side, if you don’t bring in outside counsel, bankers or advisers to assist you in the process, you may find yourself giving away more than you would want to just because you don’t have the same level of experience in the process as the people on the other side,” Quinn says.