Most acquisitions above a few million dollars are done by corporations which are interested in expanding or consolidating firms within a specific industry.
Selling for cash is obviously desirable if your tax situation can be optimised for this type of transaction. However, there is little point in being acquired if you don’t achieve your priority objectives. If harvesting the value in your business is the primary objective, selling for shares in a privately held business where you are a minority shareholder is not an effective exit. This makes the publicly listed corporation a much more attractive target. Once the listed shares are held past the lock down period, they are normally able to be freely traded, although if you continue to work for the acquirer you may be subject to some restrictions.
Alternatively, selling the business operations but keeping the freehold title to land and buildings might be an attractive option.
Part financing the transaction may be an option but you need to review the possibility that the business may get into trouble and/or the new owners are unable to repay the loan.
Normally you would want to exclude any corporation which does not have a healthy business in terms of potential growth and reasonable profits. You need to be assured they have the capacity to execute on the deal and won’t be wavering when something else goes wrong with their existing operations.
Your selection criteria for the buyer should also look at their experience in acquisitions, whether they have dedicated staff to handle the negotiations and integration and whether you think they will be a willing rather than a reluctant buyer. You don’t want to spend your time educating the buyer on how to do an acquisition nor do you want to be dependant on them making it work where you have some possibility of a claw back or potential litigation if they fail.
While it might look attractive to squeeze the last drop out of your buyer, you should try to avoid the naive buyer. There are some very good reasons why you may want to limit your selection of potential buyers to those companies which have a good track record of successful acquisition.
There is now considerable research available on acquisitions and their impact on the acquiring corporation. A 1999 study by KPMG found that 83% of mergers failed to unlock value. A 2004 study by Bain & Company of 790 deals made by US based companies from 1995 to 2001 confirmed prior research that ‘70% of all deals fail to create meaningful shareholder value”. It would seem that the likelihood of success in a merger or acquisition is against the acquirer.
A more recent Bain & Company study of seventeen hundred large public companies in six industrialized nations spanning the time period of 1986 to 2001 did uncover corporations which were consistently successful in their M&A activities.
Bain found that corporations which were successful had several characteristics in common:
Source: David Harding and Sam Rovit, Mastering the Merger: Four Critical Decisions that Make or Break the Deal , Harvard Business School Publishing, November 2004
Culture is seen to be critical in most acquisitions. Only where there is almost no integration can unlike cultures co-exist. The more integrated the planned, combined operations will be, the more critical it is that pre-acquisition cultures are compatible. The seller needs to acquire a good feeling of the match between cultures. Spending some time with the other party pre-acquisition is essential to avoid a disaster.
It is in the best interest of the seller for the acquisition to be successful, even several years after the deal is done. A successful acquisition will minimise the likelihood of post acquisition litigation. Where there is a choice between potential acquirers, the seller should give the culture match serious thought.
You want a successful integration of your business into the buyer’s and for them to achieve the benefits of the acquisition.
The experienced acquirer will have a senior member of their executive team who has primary responsibility for assessing potential acquisitions. This also makes your task easier as there is a name for you to contact. Since that person performs only by making acquisitions, they need to have a pipeline of possible acquisitions. Their job includes setting up relationships with potential targets and thus you are helping them achieve their objectives by approaching them with a possible future deal. This makes your task easier as they may assist you in setting up other contacts within their firm so you can better understand how your firm might fit into the larger business.
The strategy for the potential seller is very straightforward. Identify those corporations in your industry or adjacent to it which can best manage your type of business, establish a relationship with them to allow dialogue and then build a case to show them how the acquisition can work for them.
Give preference to those corporations which have been successful in prior acquisitions as they tend to be more serious, more diligent in their approach and more likely to conclude a deal which makes economic sense. Then, wait for the offer or decide when to make an approach to them.
Clearly successful acquirers rarely overpay for their acquisitions and so it would appear that your chance of generating a high multiple on the sale of your business which takes into account future profit growth potential would be minimal. However, it is clear that successful acquirers also look carefully at the potential acquisition and will do their own investigation of the forecasts.
If the numbers hold up to serious scrutiny and the profit potential has a high probability of being realized, a higher price can be obtained. The firm which can show it is efficiently managed, has limited risks in the acquisition, is prepared for the transition and where future growth can be readily generated, should be a good acquisition target.
Your proposition to a potential acquirer should show the buyer how they can exploit the growth potential in your business. Most private firms are constrained by limited resources, lack of funding, an inability to recruit the best people due to their size, a limited distribution channel or small customer base. Often these elements are exactly what larger corporations have in abundance.
This presents a great opportunity for the acquirer to provide the resources needed to grow the vendor’s business. The key is to find the right buyer which can readily exploit its potential. If you can show how additional revenue and profit can be generated, it is certainly possible to extract a higher EBIT multiple on the sale of the business.
There are some other good reasons why you might want to look for competent and successful acquirers. Generally they understand what to look for, thus their due diligence will be thorough. If they find a serious problem they will request it be fixed, make an allowance to fix it or walk away.
That means there are unlikely to be hidden rocks which can catch you out later on. The last thing you want is for the buyer to litigate you over something which could have been discovered during the due diligence process. A buyer which is making lots of money from an acquisition is less likely to worry about a few problems which they uncover.
However, a deal which goes sour will find the buyer going over every inch of the business trying to find how they can litigate to get their money back.
The successful acquirer who pays a high price for a business which incorporates growth potential is also less likely to get rid of your employees.
They acquire the business because they see potential in it. It is most likely that the potential needs to be supported by your previous employees, thus you are also taking care of your loyal employees by finding the right buyer. Successful acquirers also understand how to manage the handover process and are less likely to lose good people through a lack of understanding of the degree of change they are being put through.
Frequent acquirers will almost certainly have a formal process of evaluation, due diligence and integration. They will have learnt from their mistakes and built up an accumulated knowledge of what works and what does not. This should mean they won’t waste your time while they figure out how to do the deal. They also might be willing to share some or all of that information with you in a friendly deal so that the final outcome is better for both parties.
If they have a formal process, you might be able to review it to see if you fit the acquisition and return on investment (ROI) criteria. Again, this helps you weed out potential acquirers where you are not able to meet a critical requirement. However, where you clearly meet their conditions, this helps you gain more attention during the relationship building phase.
Frequent acquirers know the importance of undertaking friendly acquisitions. Companies which have been through hostile takeovers understand the levels of stress placed on both organizations, the loss of staff during the process and the difficulty of later integration. Where they can, acquirers would rather build a mutual case where both parties are comfortable with the acquisition.
By undertaking this over a period of time, both parties can sort out the most appropriate integration level and use the time to convince the best people to stay with the merged business.
If the potential buyer has made prior acquisitions, part of your due diligence should be to examine the success or failure of their previous acquisitions. Serious acquirers understand this and should be willing for you to interview business and perhaps some of those that left. Your objective is always to produce a deal which works for the buyer while allowing you to achieve a good sales price. By reviewing their prior acquisitions you can see if they have a track record of making deals successful for the sellers as well as for themselves. Were the sellers happy with their deals? Were any of them sued after the event? Did any of them stay with the merged company – what was their experience? How did the earn-out conditions work out?
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
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