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How Lots of Small M&A Deals Add Up to Big Value

Nearly a decade ago, we set out to answer a critical management question: What type of M&A strategy creates the most value for large corporations? We crunched the numbers, and the answer was clear: pursue many small deals that accrue to a meaningful amount of market capitalization over multiple years instead of relying on episodic, “big-bang” transactions.1 Between 1999 and 2010, companies following this programmatic approach to M&A generally outperformed peers.2

That pattern is even more pronounced in today’s fast-moving, increasingly uncertain business environment (see sidebar, “The staying power of programmatic acquisition”). A recent update of our research reflects the growing importance of placing multiple bets and being nimble with capital: between 2007 and 2017, the programmatic acquirers in our data set of 1,000 global companies (or Global 1,000) achieved higher excess total shareholder returns than did industry peers using other M&A strategies (large deals, selective acquisitions, or organic growth).3 What’s more, the alternative approaches seem to have under-delivered. Companies making selective acquisitions or relying on organic growth, on average, showed losses in excess total shareholder returns relative to peers (Exhibit 1).

Exhibit 1

The data also confirmed just how challenging it is for individual companies to make the transition to programmatic M&A from any of the other models we identified. For instance, none of the companies that followed an organic approach between 2004 and 2014 had shifted to a programmatic model by the time we performed our latest analysis. And by 2017, more than a quarter of those companies had dropped out of the Global 1,000 altogether because of takeovers and other factors. The story was similar among those companies we deemed selective acquirers (Exhibit 2).

Exhibit 2

When we looked even closer at the data, we saw some striking differences in what high-volume deal makers do relative to peers. For example, the programmatic acquirers were twice as likely as peers to estimate revenue and cost synergies at various stages of the deal-making process, and they were 1.4 times more likely than peers to have designated clear owners for each stage.4

These findings are consistent with our experience in the field, in which we see that programmatic acquirers have built up organizational infrastructures and established best practices across all stages of the M&A process—from strategy and sourcing to due diligence and integration planning to establishing the operating model. In this article, we will consider how programmatic acquirers typically manage each of these stages.

A programmatic approach won’t work if you don’t define the program and don’t treat M&A as an enduring capability rather than a project or occasional event.

The programmatic model may not be the right fit for every company, of course. Some businesses may contend with organizational limitations or industry-specific obstacles (consolidation trends and regulatory concerns, for instance). Regardless, it can be instructive for companies with any type of M&A program to understand how some companies are taking advantage of the programmatic approach.

Strategy and sourcing

Most of the programmatic acquirers we interviewed said they work hard to connect their strategies with their M&A priorities. The hard work starts with a return to first principles: the development of a blueprint for bringing strategic goals into deal-sourcing discussions. An effective M&A blueprint delineates the limitations of pursuing certain deals and provides a realistic snapshot of market trends—for instance, “Which market-shaping forces are the most promising within our sector, and how are our competitors likely to evolve?” Additionally, the M&A blueprint can help programmatic acquirers identify whether or not they may be the best owner in any deal or transfer of assets—for instance, “What are our sources of competitive advantage, and what capabilities are we trying to acquire?” Finally, the blueprint can help companies assess how realistic it may be to expect success from a deal—for instance, “Are assets readily available, or are they overpriced? Do we have the relationships required to carry out this transaction? Are regulatory constraints too much to overcome?”

These were the kinds of questions senior leaders at one consumer-products company asked themselves as part of a recent deal. The leadership team strongly believed the company needed to expand its presence in China and asked the M&A organization to identify potential acquisition targets. The debate over which regions to focus on went on for several weeks, until senior leaders and the M&A team realized they needed to revisit the base strategy. In a series of fact-finding meetings that took place over an eight-week period—and referring back to their M&A blueprint—the senior leaders and the M&A organization identified the amount of capital required to meet their goals, specific market trends and customer segments in China, and the potential advantages the company could confer to a target (primarily, its global distribution network). Once senior leaders at the consumer-products company had systematically explored such questions, they were able to gain quick agreement on a handful of potential targets in specific regions, several of which had not even been mentioned during the initial discussions.

Due diligence and integration planning

The programmatic acquirers we interviewed said they often tackle due diligence and integration planning simultaneously—holding discussions far ahead of closing about how to redefine roles, combine processes, or adopt new technologies. Having the right resources at the ready seems to be a key tenet for these companies. It was for one consumer-products company that, at the outset of its merger with a target, modeled the optimal sequence for migrating general and administrative tasks from both companies to a centralized shared-services group, thereby jump-starting the overall integration process.

Corporate culture and organizational health— both their own and that of the target companies—also seem to be important concerns for programmatic acquirers. Our research shows that programmatic acquirers are more likely than peers to pay close attention to cultural factors during both diligence and integration processes.5 For instance, the integration team at one technology company closely tracked the balance of employees who would be selected for the combined entity from across both the parent company and the target. If any area of the business was not achieving a balance that matched the relative scale of the merger, team leaders intervened. Additionally, employee selections could not be approved without ratification from the integration team. If two candidates were deemed equally suitable for a role, the team tilted its selection to the target-company candidate, recognizing that managers in the acquiring company likely already had a built-in unconscious bias in favor of the homegrown employee. If neither candidate was considered suitable, the team moved quickly to recruit externally.6

M&A operating model

A programmatic approach won’t work if you don’t define the program and don’t treat M&A as an enduring capability rather than a project or occasional event. Our research shows that, compared with peers, programmatic acquirers often focus on building end-to-end M&A operating models with clear performance measures, incentives, and governance processes. For these companies, the devil is in the details. Potential acquisitions are not evaluated ad hoc, for instance. Instead all the decision makers and the criteria they are using are clearly defined and made transparent to all stakeholders. “If it’s truly a program, then for each type of opportunity, you need to say, here are the targets that would constitute a doubling down, here are the targets or products we’d like to have, and here are the targets for the distribution we want,” one partner at a private-equity company explained to us. “It has to be systematic.”

To that end, one technology company treats M&A in much the same way it does customer acquisitions: it uses a customer-relationship-management-like tool to manage its M&A program. The tool is an online database of hundreds of companies that the technology company actively monitors as potential targets. Using a series of customizable dashboards, the corporate-development team updates the database and tracks statistics about acquired companies and which targets are in which phases of acquisition. (Business-unit leaders are also tasked with keeping this information up to date.) The corporate-development team generates reports, and the head of M&A analyzes the data and tracks progress on deals. The tool enables accountability across all phases of M&A; it is even invoked during executives’ performance reviews.


A clear takeaway from our research is that practice still makes perfect. By building a dedicated M&A function, codifying learnings from past deals, and taking an end-to-end perspective on transactions, businesses can emulate the success of programmatic acquirers—becoming as capable in M&A as they are in sales, R&D, and other disciplines that create outperformance relative to competitors.

Post Via Jeff Rudnicki, Kate Siegel, and Andy West of McKinsey Quarterly

About the author(s)

Jeff Rudnicki is a partner in McKinsey’s Boston office, where Andy West is a senior partner; Kate Siegel is an associate partner in the Detroit office.

Alternative Lending: Non-Dilutive Growth Capital

For many business owners, a large portion of their net worth is tied up in a single asset: their company.  This can be an unsettling situation, especially for those that may not have the time or inclination to ride out the next downturn before seeking a full sale.  Increasingly, there are options available to business owners to diversify net worth or add growth without having to sell or give up control.

As frothy M&A markets drive ever higher exit multiples, investors continue to expand into additional segments of a company’s capital structure providing more financing alternatives and flexibility. Private equity funds continue to raise capital and the buyout market is sitting on a record $1.6 trillion of uninvested capital according to Pitchbook.  We are experiencing one of the strongest seller’s markets in history.  As a result, investors are looking for alternative methods for deploying capital.  Traditional PE groups are raising minority equity and yield driven funds.  A record $97.2 billion in debt funds were raised in 2017 compared to a low of $17.2 in 2009.  Including the $69.6 billion raised in 2018 the estimated amount of alternative debt funding waiting to be invested now totals $208.9 billion according to Pitchbook.

There has always been a market for alternative lending (non-bank financing) but the focus had generally been on turnaround situations.  More often we are seeing this source of capital being used to finance healthy, growing companies.  General debt and direct lending funds have outpaced distress debt funds in amounts raised, accounting for more than half of total new debt funds.  Lenders have expanded from traditional asset based and mezzanine lenders to include more unitranche, 2nd lien, and hybrid equity options.  Mezzanine and 2nd lien lenders provide junior capital that is subordinated to traditional bank debt.  The lenders work together through a negotiated intercreditor agreement.  In some cases, a one-stop solution might make more sense.  Unitranche facilities offer a similar ability to borrow more capital than a bank will typically provide with an interest rate that ranges somewhere between bank and subordinated debt, often designed to match the overall blended rate of the two separate facilities.  Hybrid solutions include preferred equity securities with financial profiles very similar to alternative debt options.

Uses of Proceeds

Private equity firms are generally willing to have owners retain some ownership after a purchase but typically want majority ownership.  While these majority recaps are becoming very common, they don’t help business owners that would like to diversify their holdings but aren’t ready to concede control.  This is where the dividend recap comes into play.  The company would borrow money from an alternative lender in an amount larger than a bank would provide and use the capital to make a distribution to the business owners.  In this scenario, the business owner has achieved some level of diversification without ceding control of the business.  This can also be a solution when there are multiple owners that

have different objectives. The active owner can borrow or use minority equity to buy out passive owners.

Alternative lenders are also interested in growth situations, whether through acquisitions or organic growth.  In the case of acquisition, the lender will look to the combined earnings and capital structure of the companies post-acquisition to determine how much capital they can provide.  We also see situations where a company has unique organic growth opportunities but, without the proper capital in place, won’t be able to take advantage.  Alternative lenders have the ability to be more forward-looking than banks.  While banks typically base loans on trailing twelve-month financial information, alternative lenders may be able to finance based on new contracts or qualified growth opportunities.

Terms and Structure

In general, alternative lenders are willing to take on more risk than a bank, often lending an additional 1x EBITDA.  As a result, they will need to generate higher returns.  This comes in the form of higher fees, interest rates, and in some cases equity kickers such as warrants or preferred equity.  The trade-off for a borrower is additional flexibility.  While the interest rate will be higher, the loan is often amortized over a much longer period and is sometimes interest only.  This creates more cash flow to fund operations and growth.  In some situations, lenders will offer payment in kind (PIK) options for interest.  PIKs reduce the need for cash interest payments, further increasing cash flow.

Alternative lending options are not a fit for all companies.  Early stage companies with no track record of earnings or collateral will not meet necessary criteria.  As with private equity, the market for alternative lending options gets more efficient for middle market companies.  The number of lenders providing capital in amounts less than $10 million is reduced significantly.  That said, for companies that do qualify, alternative lending can be a great option for situations where additional capital is needed but owners prefer to minimize dilution and outside control.


Jon WileyJon Wiley

Jon Wiley is a Managing Director at The Forbes M+A Group, where he leads the firm’s capital formation practice. He has advised companies in a variety of industries including medical devices, food and beverage, energy, aerospace & defense, and technology. He has also advised numerous specialty lenders in sourcing debt and equity investments including facilities ranging to hundreds of millions of dollars.

Jon.Wiley@forbesma.com

The Sale of a Business May Actually Excite Employees

Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale.  Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business?  3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news.  Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.

Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale.  She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.”  As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.

Interestingly, Taylor points to something of a paradox.  While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case.  Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.

Here Taylor brings up an excellent point for business owners to relay to their employees.  A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.

A second reason that employees may be excited with the prospect of a new owner is their potential career advancement.  The size of your business will, to an extent, dictate the opportunities for advancement.  However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities.  As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.

Finally, selling a business could mean “new growth, energy and ideas.”  Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business.  This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.

There is no way around it, Taylor’s article definitely provides ample food for thought.  It underscores the fact that how information is presented is critical.  It is not prudent to assume that your employees may panic if you sell your business.  The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.

Copyright: Business Brokerage Press, Inc.

VadimGuzhva/BigStock.com

Rise of Management Buyouts

What You Need to Know About the Rise of Management Buyouts

A management buyout (MBO) is when a business’s management team purchases the company, usually by relying on both private and external finance. MBO offers a sound alternative to a trade sale. These buyouts have steadily risen over the past few years. Here’s what you need to know about this alluring M&A option.

Management Buyout Statistics
Management buyouts were most prevalent among tech companies last year, constituting 20% of deals. Eleven percent of industrial deals featured management buyouts, compared to 9% in manufacturing. This year’s highest-profile MBOs include Pizza Hut and Holiday Extras.

The Role of Political Uncertainty in Management Buyouts
Political instability undermines M&A activity, but it may have the opposite effect on management buyouts. In Britain, the General Election of 2017 prompted a surge of deal activity, as owners sought to counter risk in the wake of governmental uncertainty. In the U.S., disruption is also figuring prominently in the political landscape. Companies may feel more comfortable handing the reins over to managers, and would-be entrepreneurs may be more interested in buying companies they already know well rather than striking out on their own.

Ample Funding Availability
The availability of significant funding is also a major contributor to the surge in management buyouts. Equity and debt funds, as well as both traditional and challenger banks, are often willing to fund these buyouts. With more competition in the funding space, there’s been a major boost in the number of transactions.

Private equity firms have an abundance of cash on hand, leading to record-breaking funding at the end of 2018. With mounting pressure to put their capital for work, PE has an insatiable appetite for deals, and a tendency toward favorable valuations.

Management buyouts temporarily slowed in the wake of the financial crisis, as business owners delayed their exits in the hopes of bigger future values. Over the last few years, these increases in value have come to fruition. Though political uncertainty remains a factor, there is healthy growth in sales in the UK and the US. When there is more certainty about this process, companies can expect a bonanza in M&A activity, and especially in management buyouts.

An Eye to the Future
2018 was a banner year for management buyouts. Despite a slight downturn in activity this year, deals will likely continue at a healthy pace. As uncertainty remains an issue on both sides of the pond, the appetite for MBO remains healthy. Funding options and conditions will likely remain favorable. Of course, there’s no certainty in future predictions, and the best time to sell may be now.

Letter of Intent 101: Everything You Need to Know

When private companies are sold, the parties often sign a letter of intent to ensure that they agree to basic terms. Negotiating this document can save time and avoid wasted effort. Here’s what you need to know.

What is Included in a Letter of Intent?

A letter of intent (LOI) typically includes:

  • Sale price
  • Adjustments to the purchase price based on whether the deal will be cash, seller financed, etc.
  • The structure of the transaction
  • Timeline for due diligence and negotiations
  • Escrow to secure the seller’s obligations and the length of time escrow will last
  • A timeline for the period of exclusivity
  • Details about access to key records so the buyer can undertake due diligence
  • Scope of significant representations and warranties
  • How third-party contracts and agreements with employees will be handled
  • Each party’s confidentiality obligations
  • How disputes will be handled
  • Under what circumstances the agreement may be terminated

LOIs can be long or short-form. Longer form are more comprehensive and legally detailed. They hammer out key deal terms well in advance, but demand a lot of upfront effort. Short-form LOIs are easier to negotiate and set general deal terms, but offer less protection against a deal falling through because of a fundamental disagreement over key deal terms.

What Type of LOI is Best?

A long-form LOI is typically best for the seller. This is because once the letter is signed, leverage in negotiations transfers to the buyer. The more terms a seller can iron out ahead of time, the better. Buyers are more likely to offer concessions in a competitive bidding process—before the LOI is signed.

The buyer’s perspective is exactly the opposite. Buyers generally seek a short-form LOI with a long period of exclusivity. In most deals, the parties must ultimately balance these competing demands.  

Binding or Non-Binding?

LOIs are not typically binding, or may be binding only for key provisions. In either scenario, the agreement must be clear about what is and is not binding. It’s common for terms such as confidentiality, deal exclusivity period, dispute resolution, and expenses to be binding.

An exclusivity period will be especially important to the buyer, since this gives the buyer time to undertake due diligence without fear that doing so might harm the deal.

Other Deal Terms

In addition to obvious factor like price, the LOI should also spell out other important terms, including:

  • Whether stock is part of the deal
  • The interest and principal payments associated with any promissory note
  • Whether there will be a working capital adjustment
  • Whether there will be an earnout, and what its terms will be
  • Dates by which key deal steps should be completed
  • The specific terms of any planned indemnification agreement
  • A full and thorough disclosure schedule
  • Conditions to closing
  • Agreements about an escrow or closing agent

Evaluating Your Company’s Weaknesses

The time you spend evaluating your company’s weaknesses is, as it turns out, one of the single best investments you can hope to make.  No one should understand your company better than you.  But to fully understand your company, it is essential that you invest the time to understand your company’s various strengths and weakness.

Your company, from the beginning, has been an investment.  It’s an investment in your time, your mental energy and, of course, your financial resources.  The time and effort you expend to locate, understand and then fix your businesses’ weaknesses is time very well spent.  Addressing and remedying your businesses’ weakness will not only pay dividends in the here and now, but will also help get your business ready to sell.  Let’s turn our attention to some of the key areas of weakness that can cause some buyers to look elsewhere.

An Industry in Decline

A declining market can serve as a major red flag for buyers.  You as a businessowner must be savvy enough to understand market situations and respond accordingly.

If you spot a troubling trend and realize that a major source of your revenue is declining or will decline, then you must branch out in new directions, offer new goods and/or services, find new customers and also find new ways to get your existing customers to buy more.  Taking these steps shows that your business is a vibrant and dynamic one.

You Face an Aging Workforce

It has been well publicized that young people, for example, are not entering the trades.  Many trades such as tool and die makers will be left with a substantial shortage of skilled workers as a result.  No doubt, technology will replace some, but not all, of these workers.

This is an example of how an aging workforce can impact the health and stability of a business.  If your business potentially relies upon an aging workforce then it is essential that you find a way to address this issue long before you put your business up for sale.

You Only Have, or Primarily Rely Upon a Single Product

Being a “one-trick pony” is never a good thing, even if that trick is exceptionally good.  Diversification increases the chances of stability and can even help you find new customers.  Additional goods and services allow you to weather unexpected storms such as a supply chain disruption while at the same time provide access to new customers and thus new revenue.

The Factor of Customer Concentration

Many buyers are concerned about customer concentration.  If your business has only one or two customers, then your business is highly vulnerable and almost every prospective buyer will realize this fact.  While it is an investment to find new customers, it is well worth the time and money.

A business broker can help you evaluate your company and, in the process, address its weaknesses.  Remedying your businesses weakness before you put your business up for sale and you will be rewarded.

Copyright: Business Brokerage Press, Inc.

Sepy/BigStock.com

Why Debt Funds Are the New Industry Darling

With a booming M&A market, traditional investors have competed to get into the hottest PE funds, leading to record capital raises. Now institutional investors have set their sights on another opportunity: private credit funds.

Following the financial crisis, banks essentially shuttered their lending arms. Others trickled in to fill the void, with financial companies leading the way at first. Now all kinds of firms use private credit tactics. Though interest as risen for years, it reached a frenetic pitch in 2017. Fundraising soared more than 35%.

Big private equity firms such as KKR, Apollo, and The Blackstone Group have eagerly made their presence known in the space. After all, debt is in high demand among PE deal-makers. It offers solid returns, with few regulations. The debt market has exploded over the past eight or so years. When banks pulled back, it left skilled lending teams without a home. Many joined up with new financial institutions and started new lending arms.

Over the past few years, middle market private firms are showing an increased interest in private credit. H.I.G. Capital’s Whitehorse Capital, for instance, closed on $1.1 billion in direct investing 2017.

Businesses will always need loans. Institutional investors want in on these money-making opportunities. Gryphon Investors, middle market PE firm, closed its first fund, Gryphon Mezzanine Partners LP, with $100 million.

The big challenge here for PE firms is having potential competitors as creditors. The situation is volatile, and rapidly changing. Information leakage can be a problem, and debt and equity sides of the house must build Chinese walls that work well.

Insurance companies are also growing abundantly in the space. While some already have lending capabilities, many are growing their offerings. Manulife Financial Corp. expanded in 2017 to offer senior credit to the middle market. The insurance company.

Numerous insurance companies were active in mezzanine finance for years. These larger offerings are a natural extension of what they have done for a long time. It makes good financial and logistical sense. The big fear is that some of these new groups have not managed a fund through a financial crisis. Markets aren’t the same as what they were during the last financial crisis. So things feel different, but the next crisis will come. And it may be horrible. Many new lenders might not have the experience necessary to manage it.

With more debt available than ever before, markets just feel different. The parties at the highest risk are different, too, creating a false sense of security for some players. It’s no longer deposits and banks that are at risk. Now the risk rests with institutional investors in the lending market. They should be better able to assess and manage risk. But too much leverage is never wise. Adding more debt onto the pile of debt never lowers risk.

Some Driving Trends in M&A

The consumer goods space is humming with acquisitions over the last few years. There are no signs it will slow down, but it may change. Private-equity and mega-backed deals are increasing in number.

In addition to these players, we’re also seeing the role of shifting consumer desires. A strong interest in healthy, organic living is driving some conglomerates to really change their portfolio. This trend is likely to escalate over the next few years, as more and more consumers get on the health bandwagon.

Noteworthy Transactions
The May, 2018 acquisition by PepsiCo of Bare Foods Co. from PE firm NGEN Partners brought “healthy” carrot and banana chips under the Frito-Lay umbrella. PepsiCo previously acquired Off the Eaten Path, creator of Veggie Crisps.

The goal of many such mergers is to marry healthy living with an affordable price point and accessible products. The Honest Company, for instance, recently announced a $200 million strategic minority investment from PE firm L Catterton. Honest offers a brand that stands for something, but at a price point that’s accessible to a large number of consumers. We’re going to see more growth in businesses like Honest.

Risky Business for Larger Conglomerates
Organic and natural businesses may thrive when they’re small, but they don’t always do well under large conglomerates. Campbell’s presents a cautionary tale. It’s Campbell’s Fresh line has struggled following its 2012 acquisition of Bolthouse Farms and 2015 purchase of Garden Fresh Gourmet.

Distribution poses some unique challenges. The one-size-fits-all approach that works so well in prepackaged food is exactly what many health-conscious consumers with to avoid. Consumers may also be attracted to the unique messaging, small size, and independence of organic brands. They’re less drawn to large corporations. Large companies specialize in driving down costs and accelerating distribution. This is what consumers dislike about large companies, so it’s important to balance convenience with the mission of the original brand.

Effects on the Lower Middle Market
Companies in the lower middle market with “kitchen cook” owners, clean eating missions, and novel formulations are thriving. So too are personal care products with an earth-focused and health-driven mission. We’re witnessing an elusive breaking point where companies transition from home businesses to million-dollar-plus companies with penetration across multiple channels.

As with larger deals, integrity of the original brand is key. The found must remain present, and that means significant rollover equity and seller financing. This improves financial leverage, but it also maintains brand alignment and protects customer loyalty.

Larger brands are unlikely to reach down for smaller brands. This may be a good thing, since smaller companies must ensure the acquirer offers a good cultural fit. Family businesses are often a good starting point, since they have the flexibility to pursue smaller companies, and can generally preserve the integrity and story of the brand.

In this segment, as in all others, quality and price are key. The product must be better than something out there at a lower price point if it is going to thrive.

What Value Does an Investment Banker Add?

It’s the age old question that every investment banker must eventually answer: what value do you add? As with every other profession, investment bankers must justify themselves. If you’re selling a business, an investment banker is worth their weight in gold. They confer significant value, and can expedite the transaction while alleviating owner stress.

Yet many investment banking firms continue to advise that advisory is a dying art. They point to dedicated corporate teams that now shepherd the M&A process to perfection. They emphasize that these teams are often cheaper than outside advice. We don’t think investment banking is dead yet, or that it ever will be. Here’s what you need to know about this age-old art.

The Value of an Investment Banker

The process of selling a business involves much more than just finding a buyer and negotiating a price. The timeline from initial decision to closing ranges from weeks to months, and occasionally even years. You must negotiate all aspects of the deal, submit to due diligence, and ensure that the deal is a good fit for all parties.

That’s more than most owners can do on their own. Moreover, they will be working with a deal partner who may have significant experience at purchasing businesses, and who almost certainly has the benefit of a professional advisory team. That’s a decidedly lopsided equation. Owners go it alone—or use only in-house support—at their own peril.

Even assuming an owner can competently negotiate a deal on their own, there’s much to be lost. The demands of negotiating a deal are destined to distract an owner from the daily requirements of running the business. This can ultimately thwart operations and undermine value. In most cases, the cost of hiring an investment banker is far less than the money, profits, and time you stand to lose if you go it alone.

Why Your Advisor Must Justify Their Existence

The right M&A advisor confers significant value. That doesn’t mean you should hire the first person who comes knocking. The goal should be to find someone with deep industry connections to whom they can shop your business. You need a deal-making expert who can offer—and demonstrate—significant value. Put simply, your investment banker must be able to clearly explain why you need them. Some questions to get the conversation going include:

  • How many deals have you closed in the last three years, and at what value?
  • What is your specific plan for my business?
  • To whom do you hope to sell this business? What is your marketing plan?
  • What value do you bring to the table?
  • Can I speak to references?
  • What do you think is a reasonable value?
  • What specific tasks will you help with?

Finally, you must choose someone with whom you like working with. You’re not in the market for a best friend, but you will be spending significant time together. Ensure this is a person whom you can tolerate. Intuition and the right “fit” both matter.

 

Four Ways to Bring Significant Value to an Add-On Deal

Add-on acquisitions are more popular than ever, but they present a serious conundrum at integration. While deal partners may talk of synergies and cost savings, there may be little factual basis on which to identify what and whom to keep. Each company’s financials offer a good overview of operational capabilities, but many other tools offer better insight into integration and growth opportunities.

Add-ons have historically been used to promote inorganic growth, offering an immediate infusion of revenue to an existing platform company. In most cases, you’re purchasing intellectual property or market share that offer more cash and a chance to edge out competitors.

Here are four key areas that offer valuable growth from an add-on:

Know the Culture
When merging two different companies, you must know the corporate culture of each. Cultural fit issues are the most common reason mergers fail. It’s important to identify areas of cultural fit and shared values. Areas of possible difference are equally important to understand. The most successful mergers take the most appealing aspects of each company’s culture. Ideally, your staff’s lives should be better following the merger, and your customers should notice a positive shift in cultural change. A more restrictive working environment, fewer benefits, less pay, and a de-emphasis on customer needs are all cultural shifts that can add up to disaster.

Know the Brand
When you acquire a brand, you must have a clear understanding of the value it offers. This is doubly important if you anticipate a rebranding effort. Companies to often rebrand, only to find that the discarded brand had greater loyalty and more market penetration than the new brand they haphazardly implemented.

Know the Team
When you merge two different operations, you must determine who has the strongest and most compelling customer relationships before moving people around. The strongest players aren’t necessarily the most highly paid or respected. Instead, look at relationships and results, then plan accordingly.

Be Inclusive and Fair
The merger should make everyone’s life better, so if staff or customers feel you’re being unfair, you’re in for a rocky ride. The integration team should include vested, knowledgeable, committed players from both entities. The process should not be one size fits all. It’s equally important to recognize the value of diversity. The perspective of a single race or gender cannot possibly take into account all perspectives. You need people from a wide variety of backgrounds, or you’ll miss important information and make costly mistakes that lose you customers. Work toward consensus, not authoritarianism, in your change-management approach.