In 2021, we saw a record-setting amount of M&A deal volume, totaling over $5 trillion and surpassing the previous record year of 2007. In the wake of all this activity (which shows no signs of slowing down), many business owners are finding the idea of selling their companies increasingly attractive. Adding to this frenzy are the scores of private equity groups hungry for deals, with cheap debt and surpluses of dry powder ready to be deployed. Given this extremely competitive scenario, it is now more important than ever for business owners to understand what they are getting themselves into before engaging in any M&A process.
For middle market and family-owned businesses, there are many common misconceptions about what M&A entails. Here are nine of the biggest myths we’ve encountered in conversations with founders and CEOs:
A Deal Should Take Less Than 6 Months
Possibly the most common misconception held by those unfamiliar with M&A is that a deal process should be completed in as little as 3 to 6 months. While this can sometimes happen, it is much more common for a deal to take 9 to 12 months to conclude. Generally speaking, the faster the sale, the worse the deal is for the seller. Quick sales are also less likely to be successful acquisitions in the long run as it takes time to identify the synergies necessary to successfully integrate two companies and there are many other time-consuming steps involved in the process.
Selling Price Equals Business Value
While the valuation of your business is typically a starting point for negotiations, there are many reasons why your business can sell for more than its valuation. If a transaction is not all-cash and has any debt component, the buyer should be willing to offer more as you will not be receiving all your payment up front.
Additionally, in the current competitive market, many buyers are willing to pay a hefty premium for strategic reasons, thus it is very beneficial to leverage the expert guidance provided by an investment banking team as they can help you identify the buyers that need your business the most, which will be the ones that can offer the most in terms of value. Moreover, the competitive nature of a strong process run by a bank can naturally induce buyers to bid more for desirable assets.
Negotiations End When an LOI is Signed
One of the most important lessons to be learned in M&A is to never count your chickens before they’ve hatched. Many sellers think that an unsolicited offer in the form of a Letter of Intent (LOI) is the end all be all and they start to dream of millions before it’s even in the bank. Don’t get us wrong, an LOI can be great and, certainly, having a signed LOI is an incredible step towards completing a sale, but sellers have to remember that negotiations continue right until the purchase agreement is signed and not a second before. It is crucial to be more prepared than ever post-LOI signing as many deals fall apart during due diligence.
The Best Buyer is the Most Obvious Buyer
While it can be a good idea to include more obvious buyers such as larger industry competitors in M&A discussions, we find that it is often outlier buyers looking to make strategic moves into new or uncharted territories that will pay the most. If your company is in a particularly attractive industry, those who want in on the industry will likely be much hungrier to acquire your business than those already in the industry. An innovative investment banking team can help you identify these seemingly unlikely buyers.
An Investment Banking Team isn’t Necessary
Consider the sale of a house; if a homeowner shows buyers an empty house themselves, buyers may or may not want to purchase the house. If they do, they most likely will not feel particularly compelled to pay a premium price. However, when a house is staged by a team of professionals and shown to buyers by a knowledgeable agent, not only will buyers be likely to pay more, but additional buyers will enter the mix, creating a competitive bidding process. A full-time, dedicated M&A team does just this and much more for your business—they help “stage” your business to achieve an attractive valuation and leverage their network to attract as many relevant buyers as possible, making sure that your company is sold to the best buyer for the best price.
Buyer Debt is Always a Part of the Purchase Price
Seller paper is not as commonplace in M&A transactions as many think. Buyers often try to deceive sellers into believing that all deals have a debt component and into taking a more debt-heavy deal than they should. The reality is that seller paper seldom offers the protections necessary to justify a seller accepting debt as payment, and it should be avoided in deal structures unless it drastically increases valuation.
The All-cash Offer is Always the Best Offer
This may sound contradictory to the last point, but sellers should also beware of buyers that immediately come to the table with an all-cash offer. Sellers should remember that buyers are going to make offers that are the most financially advantageous for them, thus if they are offering all cash with no negotiation having taken place yet, it is because they think they are getting a really good deal and are trying to lure you in with an attractive structure that likely heavily favors them. It is important to be patient in M&A and to not fall victim to the attractiveness of a quick, all cash sale. Transaction structure can be a double-edged sword and is just another reason why it is crucial to have an experienced M&A team to help you identify the best structure for you.
Acquisition Conversations Should Only Include the CEO and CFO
Because of the confidentiality aspect of most M&A transactions, many sellers try to keep who’s “in the know” as limited as possible. This often limits perspective in the sales process and can also make due diligence more difficult to complete for the buyer. For midsize companies, it is better to bring a few leaders from various areas of the business into planning the M&A strategy as their differing viewpoints can bring a lot to the table. Having a management team on board with a sale is also very attractive to a buyer, as it will make it easier for them to integrate your business into theirs, and the easier they think it will be to integrate, the more likely they are to actually close on a transaction.
100% of Your Business Must Be Sold in an M&A Transaction
M&A transactions do not have to be “all or nothing.” Buyers commonly put pressure on sellers to sell 100%, for obvious reasons, as they are often buying into your business because they believe in the story and want to maximize profits. However, in the current heated market, minority transactions are gaining steam among buyers looking to capture a piece of an exciting business. Selling a minority stake of your company can allow you to retain operational control of your business while increasing available capital and can give you the advantage of having a relationship with a strategic investor to encourage growth.
Written by Julien Meyer
At NorthStar, we work with sell-side businesses every day, helping them to arrive at a proper business valuation, attract qualified buyers, and structure deals to their advantage.
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