Private equity exits are expected to increase during the second half of this year. One factor driving the growth in deal activity is the looming expiration of federal capital gains tax cuts, which is resulting in a hastening of the deal process to ensure completion by the end of the year.
With this heightened deal activity and greater scrutiny from many directions, the role of sell-side due diligence has never been more critical. Concerns brought to the surface by buy-side due diligence have increasingly delayed deals, caused them to fail or eroded the value of companies due to unanticipated issues. In this atmosphere, it is imperative to retain control of the sales process and provide a transparent, balanced and credible view of the business in order to establish trust with a potential buyer and expedite the deal timeline.
Sellers often underestimate the time and due diligence requirements of potential buyers. In certain situations an outside adviser may not be necessary; however, examples of where sell-side due diligence should be used are companies that:
• Have undergone certain transformational changes, such as leadership changes or acquiring or selling businesses or divisions
• Employ a lean accounting staff
• Have implemented or are in the process of implementing cost-saving initiatives
• Have suffered changes in customer base or employee turnover, especially in key accounting roles
• Have experienced growth
• Are considering the sale of a division or segment of a business
In these situations, sell-side due diligence allows the seller to avoid surprises, maintain control of the process and minimize disruptions, significantly increasing the probability of a successful transaction.
Learn more about sell-side due diligence, including how to alleviate the unique issues related to carve-outs and the value of uncovering and positioning tax liabilities and benefits, in McGladrey’s white paper.
By Michael J. Grossman and Patrick Conroy
You don’t always have to be an entrepreneur or form new patents to successfully grow your business. This recent article by Carol Tice will give you some ideas on how to be innovative within your current business.
In today’s marketplace, product life cycles are shrinking, global trade is leading to growing competition and the internet has lowered barriers to entry in many industries. So the need for innovation is more vital than ever.
How can you kick innovation into high gear at your small company? Here are five ideas:
Swim upstream. Is everyone in your industry doing things the same way? Maybe there’s an untapped need others are missing. For instance, one Midwestern grocery chain, Hy-Vee, recently began stocking a special checkout lane with only healthy snacks. It’s a smash-hit with health-conscious moms who shop with young children, and the chain is reportedly mulling expanding the idea to 100 stores.
Face your fear of change. We crave exciting new things as consumers, but as business owners we often fear having to implement new ideas. Create a culture that integrates and celebrates change to spur more innovative initiatives.
Listen to customers. If you feel short of creative energy, do a focus group or take an online poll. This is a key to many of Procter & Gamble’s newer products.
Add unusual services. You don’t have to be an inventor to be innovative — just add a service that isn’t traditionally offered in your industry. An example is the new Duane Reade flagship store on New York City’s Wall Street, which has such amenities as a nail bar, juice bar, sushi bar, no-appointment doctor, cell-phone charging station and electronic stock-exchange ticker.
Get behind your idea. Don’t be like Kodak, sitting on your digital camera invention until competitors eat your lunch. Once you’ve got an innovative idea, put it out there and promote it with all you’ve got.
Do you have a transferable entity, or a high paying job?
Too often private, middle market companies are not prepared for the proper liquidity event they desire in their eventual exit. Buyers in the capital markets today are looking for a transferable entity not a high paying job. Risk mitigation in today’s buying community has become more important than the sophisticated engineering models of EBITDA. Most sellers realize this paradigm shift after it’s too late. Once an owner starts the process often times the “cracks in the sidewalk,” begin to appear.
At IAG we work with you to develop a comprehensive exit plan that will fit your specific needs. Exiting a business means different things to different people and exit strategies can vary significantly. An owner’s goal may be to simply free up time, energy and resources to explore other interests or they may want to walk away from the business completely. Most likely, an owner’s goals are somewhere in between.
Choosing the best exit strategy involves a careful assessment of your personal, family and business goals and circumstances. While financial needs are certainly an important factor, there are many other considerations that need to be factored into a well-planned exit strategy.
If you know these strategies and decide in advance which one is best for you, then you have a better chance of leaving your business under your own terms and conditions. Without planning, you are more likely to settle for terms beyond your control. A comprehensive exit plan will consist of many areas both discreet and obvious.
VALUE ENHANCEMENT STRATEGIES
Sophisticated business buyers consider a number of factors in their evaluation of a company. We have identified over 93 important factors that buyers need to consider in determining the value of a particular company. These factors are divided into Personal, Business Operations, Industry, Legal / Regulatory, Financial, and Economic / M&A Market. Each factor should be rated as an area of strength, an area of potential improvement, or as neutral meaning it has no major effect on the value of the company. The company should then focus on highlighting strengths and mitigating weaknesses.
Value Enhancement focuses on improving the profitability and cash flow of the business while attempting to mitigate the risk involved in the ownership of the business, making your business an “excellent” performer in the industry. This involves all aspects of the business to include facilities, production and personnel, as well as financial performance.
Key questions you need to answer:
1. Is my company dependent on me?
2. How do I compare to other companies in my peer grouping?
3. Do I have proper management metrics?
4. Is my management team transferable or effective at all?
5. Is my client concentration adequate or do I generate business from one major customer?
6. What is my return on labor cost?
7. Can I portray quality of earnings or am I up and down?
8. How can I create critical mass in my company?
If you don’t have a positive answer to all of these simple questions, IAG would like to present you with an opportunity to participate in our “ERA” or Economic Reality Assessment practice. This two-day analysis will help you and your family realize the areas of your business which need to be addressed before making the decision to sell. Let’s face it, there isn’t a perfect company, however buyers are demanding such. What good is quality of earning if you can’t graduate from due diligence?
Contact us at firstname.lastname@example.org. The IAG website at www.saleyourbiz.com can also be referenced for more information.
Remember the last place you want to find out that your company is only worth a dollar (1.00) is at the closing table!!!
The M&A climate has been tough in 2016. Not only are fewer mergers occurring, but 50-80% of the completed deals are failing. Whether it’s a clash of cultures, failed synergies, or something in the water, it seems like only a matter of time before you find yourself in the midst of a failed integration.
To help us understand how to avoid failed integrations, we spoke with Danny A. Davis, one of the most respected integration specialists in the UK. Davis is the founder of DD Consulting and recent author of M&A Integration – How to do it from Wiley.
Davis explained to us that one of the most important steps in preparing a successful integration is the act of comprehensive planning. Ill-planned strategy is more likely to derail a merger than any culture clash or issues with synergies. He explained, “The reason people come down to culture and communications is because they are used as excuses when things go wrong. Rather than admitting they’ve done something wrong or that they had a bad strategy, people talk about culture. It is more important to think and plan the integration strategy for the companies, the products, and the people.”
During our conversation, Davis walked us through some of his most important planning techniques. When preparing for a merger, Davis finds it important to consider everything, to begin the process with a standard working procedure, and to plan for the plannable. A few highlights from our conversation are below:
Early Planning Helps You Find the Right Deal at the Right Price:
“I like to start planning as early as possible. Ideally, you would start planning as soon as you decide to buy something. Although you don’t want to spend too much time and money planning (since you are unsure if the deal will close), it is extremely important to do some planning. If you have no plan for the target company, you are going to pay the wrong price and you are not going to be ready to handle the integration. I would do a couple of days planning right at the start. At latest, I would start building a full integration plan around 100 days before you believe the deal will take place.”
Consider Everything when Sourcing Deals and Picking a Target:
“When determining merger criteria, you need to consider absolutely everything. If you were to start with a blank sheet of paper and invent a 5,000 person company, you would need to consider every process and every situation to determine the best strategy. Although you may not ever start with a blank piece of paper, you still need to consider everything. By considering all the necessary elements, you can build the most effective strategy.”
Build a Standard List of Items to Review when Planning an Integration:
“For each merger, I have a list of about 6,000 items to consider. With every new deal, I add a few items. Although deals are always different, and require different plans for different items, we can take a somewhat standard approach to increase efficiency. Many companies start from scratch each time, which costs money.”
“As deals get larger, they becomes more complex and the list changes. For example, with a $5 billion deal, I will likely make plans for each of the 6,000 items on my prepared list. However, if I’ve got a small deal – $5M – $10M – I can quickly narrow the list down to a few hundred items. The rest of the items are irrelevant or not appropriate for that deal.”
Accept the Unknowns:
“As you plan, there will be a whole slew of information that you can’t plan for because your due diligence only throws up a certain amount of information. Although you may have a full plan, there will always be information to find out. It is better to wait until you’ve bought the company to discuss these issues. After the first few days or weeks, you will be much better equipped to answer these questions and issues. In some cases, the target company may have already thought about the issues and you can adopt their strategies.”
Early Planning Makes You an Effective Decision Maker and Executor:
“If you have a strong plan established, you can communicate effectively right off the bat. Many problems in deals originate from indecisiveness. Good planning and early planning leads to quick decision making, quick delivery and good communications.”
The strong foundation of effective decision making and good communications prepares you to handle the typical challenges of post-merger integrations. We plan to continue this conversation with Davis and publish an article next week discussing the typical challenges found in a post-merger scenario – especially around planning for integrating divisions, dealing with internal politics, and what you should focus on first.