In a recent interview with Financier Worldwide, David Jorgenson, chief executive of Equiteq, suggests deal flow in 2018 will be supported by continued low interest rates and large pools of capital available for acquisitions among both strategic buyers and private equity investors.
With the forecast for M&A in 2018 predicted to be as lucrative as 2017, it’s anticipated businesses will continue to see a rise in unsolicited approaches from buyers. In fact, about a third of Equiteq transactions start with a client receiving an approach from a buyer.
However, despite a seller receiving an enquiry, there is no guarantee that a deal will be done. In reality, given the number of companies looked at by Trade and PE investors, the chance of it closing can be relatively low, so taking the right approach from the very beginning is essential in maximizing the opportunity and minimizing the opportunity cost of wasted effort.
In this blog Bruce Ramsay, managing director, business development at Equiteq, shares his thoughts on how best to manage the process from initial approach to a closed deal.
- Make sure you understand the realistic value of your business
If the business is currently worth $40m but there is a desire to get to $50m, know that before you start conversation. This will drive your strategy as to whether you are just heading straight to a premium price with one buyer or opening up a process to a number of other potential acquirers.
- Don’t disclose too much information too soon
There is only one chance to make a good first impression and nothing is more disillusioning to us than a seller that says they have just sent all their management accounts to a potential buyer. It matters. It’s important to control the flow and disclosure of information and anything other than public information should be controlled and presented personally to ensure there is no room for incorrect interpretation.
- Ensure the initial data share presents the business in the best possible light
Building on the point above, as you disclose information ensure it reflects well on you. This is not about ‘falsifying the evidence’ (as you would only get caught out later) but choosing what you share and how. For example, if year-to-date trading and forecast is below par, only share the budget figures if a better initial picture is presented. Always use plenty of adjustments in presenting the financial performance, which again can be slowly explained in future meetings.
- Focus on the attributes that would be most valuable to the acquirer
Think about why that incoming acquirer is interested, it is highly unlikely to be because of the P&L. It will more likely be skills, services, geography, clients or personnel that can complement the management team.
For example, is it the rate at which new clients are being won, long-term strategic client relationships or particular technical skills in the business that might be desirable? Work out where the value lies and then present that data back in a way that supports the reasons why the business is an attractive opportunity.
- Present data with the buyer in mind
Think about what the business might be worth to the buyer and quantify that by considering the synergies and presenting the financial justification. Detail what could be achieved with synergies with this particular buyer, such as the specific savings on cost, the potential to sell to X more customers at Y revenue and Z% net profit.
By putting together realistic scenarios as to what can be achieved, and presenting those as the future opportunity, the right discussion will be initiated and from there it will be a case of building the parameters. If you have done the calculation well, when the buyer says “but we would only sell into 10 new clients not the 20 you showed” you can easily re-calculate and still present a compelling case.
- Consider making the initial price suggestion
Some people talk about ’anchoring’, the normal process is to get a buyer to make an offer and for them to explain how they’ve calculated that. But at times it can be a good idea for the seller to state what the business is worth. The advantage of this is that it can position the business at a much higher value. Referring back to the negotiation theorists and Zone of Possible Agreement (ZOPA), if the business is worth $40m but could be worth more by launching into a $50m offer the ZOPA has been expanded – however, the offer must be based on facts, see point five.
- Understand possible deal structures
It is likely that a seller will only undertake detailed due diligence with one buyer and, providing no problems arise that will derail the process, that will result in a sale. However, during this stage it is important to not only understand the possible deal structures but to only progress into exclusive due diligence with a letter of intent (LOI) where all the commercials are clearly detailed and relevant disclosures presented.
The moment the LOI is signed and the deal becomes exclusive, the possibility for you the seller to negotiate becomes greatly reduced, as does the ability to bring in any other buyers. In other words, the exclusive period should not be entered into without an agreement that:
- Includes the value
- Has all key commercial elements explained in as much detail as possible without having to go into due diligence
- Discloses any relevant information that is likely to come up in due diligence
As a seller, you are in a more preferable position if you are able to determine what the current projection of performance before beginning the LOI process.
- Don’t go it alone
Don’t try to undertake the process alone. In a recent Equiteq transaction, our client, Insight Strategy Advisors, had received various unsolicited offers. We designed and managed a competitive sale process that produced tremendous buyer interest and resulted in a purchase price that exceeded ISA’s original, pre-Equiteq offers by over 100%.
Having someone to guide the way is a benefit, not just to the seller but also to the buyer. An advisor helps in identifying to the seller what is normal and acceptable and helps smooth the bumps in the road to get to the point where a transaction can be done.
If a consulting firm has approached you to make a potential acquisition offer, or if you are considering a sale of your firm to a larger consulting buyer now or in the future, you can find more information in our article ‘What to expect from consulting firm buyers’ and if you would like to discuss your plans, please get in touch.
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