M&A: Planning Ahead

M&A: Planning Ahead

Doug McCullough, McCullough Sudan, PLLC

mccullough@dealfirm.com

An investment banker recently told me that finding buyers is never a problem; the difficulty is in finding sellers with good companies who are willing to sell at a realistic valuation.

If you’re a business owner or an executive, you may have already experienced being pursued. You may have received unsolicited offers from potential buyers, as well as advertisements from investment bankers seeking to represent you in future deals. Rather than reacting to unsolicited offers or advertisements, business owners should plan for the eventuality that they will receive an inquiry from a potential buyer or investment banker.

Occasionally the first offer from a buyer – particularly a strategic corporate buyer who knows the seller or industry well – may actually bring an appropriate offer. But the only way for a seller to know if the offer and the terms are reasonable is to understand their company’s value. This could be done internally by a competent CFO or finance department, or by working with a valuation firm, CPA, or investment banker who would analyze the company’s financial history and projections and compare that to other companies of comparable size that have recently been sold in similar industries.

Investment bankers play an important role for sellers who are considering selling their company. However, executives and founders should be hesitant to sign an engagement letter with the first investment banker who shows interest in their company. I won’t make any investment banker friends by saying this. But I occasionally caution clients when they sign an exclusive engagement letter with an investment banker. When they sign such an engagement letter, their company becomes that banker’s “inventory.” After all the “product” an investment banker sells are companies. Executives and founders who are interviewing investment bankers should check their references and vet their reputation through their trusted advisors such as corporate attorneys and CPAs. If a company wants to evaluate an offer without retaining an investment banker, the company can obtain a valuation from a qualified appraisal firm or rely on the seller’s own finance team.

A company anticipating a sale in the next one to three years should consider estimating the value internally, or use a third party professional to understand the value of the business. If the company likes the valuation, they may want to seize the opportunity and initiate a sale process. However, if the shareholders are underwhelmed by the current valuation, it is probably time to consider business plans for expansion and increasing revenue. In either case, understanding the value of the company at an earlier day is essential information. The earlier this is done the better. For instance, successful start-ups and emerging companies typically factor in their “exit strategy” from inception.

Also, by having a conversation with the company’s existing advisors such as corporate attorneys and CPAs, the company can get its corporate financial and tax matters squared away to better position itself for a future deal. There may be some business succession planning that should be done well in advance of a deal, especially for a business’ older shareholders.  In other instances, if the company wants to launch into a growth phase before taking the company to market, it may be appropriate to offer an equity compensation arrangement to incentivize key management who will be key to the company’s rapid growth.

In any event, preparing for an eventual deal will likely fetch better terms, better valuation, and may ease the sale process.