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The Evolution of M&A

Thus far in 2021, M&A deal-making has moved at breakneck speed, driven by the ongoing economic recovery, surpluses of buyside dry powder, and the low cost of debt. Also, the impending probability of an increase in the capital gains tax has made buyers and sellers alike want to move quickly to maximize deal value. Tech has continued to be a primary focus for many private equity firms and strategic acquirers, with SaaS, fintech, and cybersecurity being among the most active verticals for deals. 

As institutional investors have loosened the investing strategies they adopted in the wake of Covid-19 fears, they are now looking back to alternative allocations resulting in robust fundraising activity for private equity in 2021. In the first half of the year alone, PE groups closed 3,708 deals worth $456.6 billion­—nearly two-thirds of all the observed deal value in 2020.

Seller Beware

In these times of record high multiples and frenetic deal activity, exiting has become increasingly more attractive for business owners and founders. The elephantine buyside demand promises many businesses a quick sale, which may lead to founders taking deals prematurely without weighing their other options and properly evaluating the merits of these deals. Because of market saturation and competition in the middle market, many PE general partners have shifted their focus downward to a new value creation strategy: a search for platform add-on opportunities. 

Rather than competing in the very active middle market, buyers are now looking to drive the value of their existing platform companies up by acquiring smaller, unrepresented companies in less competitive add-on deals, guaranteeing them attractive exit opportunities. The proportion of add-ons to all PE deals hit a record high of 74.5% in the first half of 2021 and the search for add-ons continues.

This refocusing among buyers stems from the opportunity for significant ‘multiple arbitrage’ that can be obtained by preying on founders unfamiliar with the sell side process and how to navigate a deal. By seeking deals where companies are unrepresented by investment bankers, and therefore unlikely to have a competitive selling process, buyers gain all the leverage by quickly offering founders seemingly attractive exits at values often much lower than what is fair.

How to Avoid a Premature Sale

To avoid the possibility of taking a bad deal, many business owners hire an investment bank to represent them. An investment banker will partner with owners to manage and strategize the process of a sale, allowing owners to remain focused on managing their business without the draining distraction of navigating a deal alone. 

Many business owners underestimate the time and effort it takes to complete a successful sale and will throw in the towel at the first whiff of an offer. A team of bankers will see the process through to the end and guarantee that nothing short of the best deal closes.

Sellers also often make the mistake of not establishing an appropriate nondisclosure agreement when entertaining buyers. This mistake can be detrimental to a business’ health if buyers aren’t legally prevented from spreading sensitive information during the business’ sale process. When working with a team of bankers, sellers can rest assured that the team will create airtight NDAs necessary to ensure that the interests of the business are fully protected.

What Do Bankers Do For You?

Bankers prepare your company for sale by performing an independent, expert valuation of your business, while assessing potential exit opportunities among both PE firms and strategic acquirers.

Through their existing relationships across many industries, bankers can identify attractive buyers that a seller would not have initially considered and that may be better suited to help the business get to its next level. Additionally, the team will ensure that the business is prepared for due diligence (typically the hardest part of the process) by properly populating the virtual data room with information that is typically requested by buyers, as this will go a long way in helping the deal close faster. 

As a result of their established credibility, the team of bankers will add confidence to any transaction and lead buyers to approach deals much more seriously and cautiously knowing that the bankers can’t be taken advantage of.

When it comes time to start entertaining buyers, bankers will be your steadfast partner and will use their expansive network to attract a wide array of serious buyers. The competition that the bankers introduce prevents the unfortunate event of a company selling too quickly to a predatory buyer at a less than ideal price or with unfavorable terms.

By running an auction process, bankers ensure the realization of maximum value by creating an environment for competitive bidding—allowing the seller more choice and room for negotiation. Without bankers, sellers often slip up by prematurely signing letters of intent without considering the terms and structure presented.

Are all LOI's made equal?

There are many details to consider before signing a letter of intent that are often overlooked by an unrepresented seller distracted by the excitement of a sale. For instance, sellers may fail to ask questions such as:

  1. How long is the exclusivity period stated by the LOI?
  2. How much of the deal is cash up front vs stock or debt?
  3. What are the buyers’ plans for employees after the sale? 
  4. What, if any, are the earn-out provisions?
  5. How will existing stock-options be handled?

This is by no means an exhaustive list, as there are many more items to review in an LOI that sellers may not know to pay more attention to. When working with a bank, their expert team will thoroughly review letters of intent to approve or negotiate key terms and structure before recommending a signature, as the leverage often shifts to the buyer once an LOI is signed.

Getting To a Closed Deal

After a favorable LOI is signed, the bankers’ job is still not done, as they will readily assist both parties in completing due diligence for the specified period. The sale of a company requires many legal and tax considerations that can create quite the headache for a seller.

Because of this, the bankers will work with legal counsel to ensure that a proper purchase agreement is drafted and signed, and that all the tax implications of the sale and legally required notices to shareholders are addressed, leaving no stone unturned.

Finally, upon closing, the seller can relax knowing that the biggest transaction of their life was carefully managed and orchestrated to result in a fitting reward for the culmination of their years of hard work.

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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