Mergers and Acquisitions (M&A) can be an exceptionally stressful process for an unprepared business owner. It is a complex and time-consuming undertaking outside of their normal day-to-day experience.
M&A is also rife with considerations beyond mere financials: legal complexities, psychological and social considerations, political power plays, and other intricacies. It is important for the business owner to meticulously navigate these multifaceted challenges before embarking on the pivotal decision to sell.
Advisors play a crucial role in the M&A process. Providing an unbiased view, objective insights, expert guidance and support, they create value to buyers and sellers alike. While there are typically more dedicated resources on the buy side due to the buyer’s need to thoroughly evaluate potential investments and assess risks, this article will focus on the advisors’ pivotal role on the sell side of M&A.
On the sell side, an advisor provides an unbiased view of assets, confirms motivations, and guides with a strategic approach. Advisors ensure organizational readiness, clarify valuations, and offer a realistic market perspective. They open doors to potential investors, provide expert guidance, and coordinate and facilitate the negotiations. Ultimately, advisors turn a potentially daunting process into a well-managed, informed, and successful path toward mergers and acquisitions. They can be responsible for specific areas and stages, or a seller can even trust the whole process to be facilitated and led by an advisor.
Ideally, advisory services engaged prior to even considering the M&A process can bring significant value. An experienced advisor offers an outsider’s objective valuation and impression, which may challenge the seller’s expectations and align them with market reality. This helps the seller position themself in the process and have clarity on what takes place and when as well as on their level of involvement in various stages.
Sell Side: Grappling With Time Constraints and Valuation Complexities
M&A engagements revolve around time and money. Time is often about closing the deal as soon as possible. For the seller, M&A is an extra burden and typically hard to keep up alongside other things. Without requisite dedication, the seller with limited capabilities may lose momentum compared to the buy side.
Running the M&A process on the side of other priorities, the seller often finds themself grappling with time constraints. Numerous unsolicited factors may pressure a business owner to seriously consider the sales, leading to a need to urgently initiate the process. Changes in legislation, taxation, unforeseen succession requirements, shifts in the industry landscape, or geopolitical issues can all be catalysts for expeditious action.
Valuation of a company is a multifaceted process. Financials, of course, play a central role in establishing the baseline, but valuation also involves the seller’s personal perceptions, rooted in their emotional connection to the business, the people involved, and the pride they take in their accomplishments and sacrifices.
A business owner benefits from conducting an internal due diligence, which can result in an investment memorandum that provides insights into the potential buyer’s perspective. Constructive discussions often occur between the seller and their advisor to reconcile discrepancies in perception and to align perspectives towards mutually satisfying outcomes, especially when the seller’s expectations and conclusions do not align with those of the advisor.
Despite meticulous valuation practices, the final deal value may appear analytically unjustified. In some cases, the buyer simply proposes the terms, the sell side accepts them, and the deal is closed.
When a seller wants to rush the process, and valuation is fraught with contrasting viewpoints between the seller and the advisor, it creates a challenging starting point for the M&A process. If the sell side decides to go ahead despite these discrepancies, the journey becomes tougher, and the likelihood of achieving the desired deal closure decreases. In such cases, the only outcome may be the learning experience of missing out on the deal entirely.
Buy Side: Ultimate Focus on Financial Results
Buyers typically approach M&A cases through the lens of financial results and projections. They often have a goal and a strategy to attain it. Looking for and absorbing targets, sometimes in volumes, the buyers aim at favorable deal structures and warranties. Additional value accrues from synergy in the form of cost savings, revenue growth and improved efficiency. When the vision and culture of the entity being acquired align with an existing resource, the purchaser can contemplate obtaining a target with regards to potential synergies that can be anticipated. The buyer can also acquire an asset without contemplating the synergy.
Synergy is more than just a strategic concept. It is about culture, communication, and execution. If the two companies involved in an M&A transaction can achieve synergy in all of these areas, they will be well on their way to achieving the objectives of the transaction.
Shareholders and investors pursue both financial performance and ideological alignment with the organization’s identity. A successful organization must keep its strategy on course and achieve the desired combined value. This requires alignment of strategy, structure, and competencies with proper execution and continuous improvement of processes. The board of directors plays a vital role in ensuring the alignment of strategy with expectations, with any deviations thoroughly discussed with top management.
Long-term organizational success hinges on integrating cultural, competence, and other essential factors. This integration plays a significant role in rebuilding a highly performing and business-focused entity that not only fosters a positive work environment but also contributes positively to society. Investors focused on these ‘soft areas’ of integration also benefit from improved financial performance and healthier portfolios.
While integration issues seem to be downplayed, the focus on financial considerations and the deal structure comes largely from the M&A process itself: The buyer and seller have limited possibilities to interact openly pre-deal. It is the buyer that has the game plan for the M&A and merely conducts a preliminary analysis that includes the integration criteria. Thorough integration planning is simply not possible at this early stage.
For the buyers, the access to detailed financials and other records, operational data, and key performance indicators – over a signed formal NDA – enables them to conduct a preliminary due diligence and make informed investment decisions. It allows buyers to assess the target company’s financial health and strategic growth objectives, identify potential risks, and evaluate the potential for integration.
No Bad Deals for a Seller: The Power of Preparedness
Engaging in mergers and acquisitions requires well-informed critical decisions. These engagements are not business as usual for most organizations, but rather infrequent bouts of discomfort for both the owners and the entire organization.
Preparation Buys Peace of Mind
A well-prepared seller has a better chance of avoiding unfavorable cases. In more serious cases, the seller may engage an advisor and capitalize on their M&A experience. By involving additional resources who are competent and dedicated to M&A, the seller is better positioned to achieve favorable outcomes. Especially in critical negotiations, where the terms are on the verge of the seller’s minimum acceptable level, preparedness makes all the difference. Often, so-called ‘price buyers’ – actors with a systematic, transaction-focused M&A agenda – may attempt to push negotiations to the limit. However, diligent sellers, who are well-informed, can navigate these tricky situations calmly and make sensible decisions.
Based on the agreed-upon game-plan encompassing strategy, deal structure and preferences for the buyer profile, a seasoned M&A advisor evaluates buyer interests and criteria before accepting them in the process. This practice extends to the selective sharing of information exclusively with chosen buyers.
Anticipate Challenges
When crafting a deal, the seller must anticipate potential challenges, including contingencies arising from buyer observations that could impact the deal’s structure and valuation. If these observations are agreeable, both parties can negotiate mutually beneficial terms, such as post-merger commitments. The advisor’s role includes identifying challenges, aiding in strategic preparation, optimizing deal structures, assessing valuation impact, assisting in negotiations, and guiding strategic decisions. They help sellers coordinate, navigate complexities, address issues, and enhance deal value by leveraging their expertise.
Understand the Other Party
Buyer may be seeking an investment target with a solid financial track-record and approach the target as if it is to be included in their investment portfolio without considering any synergies in their strategy. In that case, sellers can highlight their value by aligning their added value attributes with the assets of the acquiring party. This is part of the preparation, where the advisor can study the buyer, which makes a significant difference in negotiations and in the overall M&A strategy. Sellers may choose to focus only on buyers who include synergy as their consideration to acquire assets.
Of course, after the deal is finalized, the buyer might not be obligated to implement the envisioned synergy.
Synergy plays a pivotal role in the context of “selective share disposal for synergy enhancement.” In this scenario, the seller aims to achieve synergy by partnering with a strategic buyer through the sale of a minority of their shares. For instance, a seller might seek to access a specific market while complementing the buyer’s portfolio, thereby capitalizing on the potential arising from their integrated structure.
Uncover Hidden Assets
Advisors have the expertise to uncover hidden assets that may not be readily apparent in financial books or public markets. These intangible assets may manifest concretely in the company’s operations or unique products created for specific operational needs. For example, an in-house product developed to support specific areas of operations could become a valuable asset in negotiations and impact the overall valuation. However, to fully capitalize on such assets, a dedicated strategy and development effort might be required. Ideally, the hidden value would be reflected in the financial statement as an asset, positively influencing the valuation.
Unfortunately, entering the M&A process often leaves little time for assessing hidden assets.
Unveiling Mutual Benefits through Face-to-Face Meetings and Site Visits
Beyond customary information exchange, face-to-face meetings and site visits balance expectations during and after M&A. Sensing assets beyond financials benefits both sides. It lets sellers ascertain the desirability of the buyer profile, assess how new ownership impacts their work, and pursue the talks. For the buy side, this interaction helps develop a deeper understanding of the seller’s vision, culture, and potential challenges. This insight can inform their valuation, integration strategy, and overall approach to the acquisition, leading to more informed and successful decisions.
The Importance of Time Before the Negotiations
The advisor’s ability to analyze and capture these hidden values relies on sufficient time for thorough assessments. Regrettably, the typically tight timelines of M&A negotiations may not allow for a comprehensive exploration of these assets, potentially causing missed opportunities for the seller. Engaging an advisor before seriously considering entering the sales process proves highly beneficial.
An illustrative example from past experience involves a negotiation between a buyer and a seller, where the sell-side advisor noticed indications of the buyer’s interest in the seller’s development performance and high-quality prototyping capabilities. Surprisingly, the seller had not publicly presented this aspect as a value-adding point, depriving them of the opportunity to leverage it as a valuable asset during valuation discussions. With more time at their disposal, the seller could have openly claimed this capability as a significant performance factor and as a competitive edge in the market. This could have had a positive impact on the overall deal and possibly even influenced revenue allocation.
Strategic Discussions and Valuation
The success of M&A negotiations depends on strategic discussions, often facilitated by the advisor. They aid the seller in showcasing the company’s overall value while tactically highlighting value points aligned with the buyer’s interests. Depending on the context, buyers might prefer holistic value discussions or focus on specific elements for negotiation. A proactive approach, accounting for potential pressure points, underscores the need for advisor support. Advisors also facilitate objective decision-making amid challenges and ownership transition.
Another rationale for advisor involvement is to position sellers as active drivers of the process rather than relying on a single transaction opportunity. This prevents compromised deal structures that could result from such one-shot scenarios, ensuring sellers have alternative avenues to explore.
Trusted Advisors Play a Vital Role on the Sell Side
An executive advisor serves as a trusted partner for an organization’s shareholders and top-level decision-makers. Collaborating with owners, senior leaders and other key stakeholders, they provide guidance on strategic matters, crisis management, and leadership development. Their role involves both short-term tactics and long-term vision, fostering trust, ethics and empathy to create a strong partnership. Executive advisors with their extensive experience function as a sounding board for the client and have a duty to provide honest feedback. As such, they often play a pivotal role in the M&A process.
The seller may even prefer the advisor to shoulder the very burden of guiding and coordinating the process altogether. In so doing, they not only offload the operational complexities onto the advisor but also tap into a wealth of strategic insight that they bring. While a traditional M&A consulting engagement involves limited preparation and focuses primarily on financial aspects, a trusted executive advisor can expand the scope of awareness from the M&A transaction to the broader context of the seller’s business. This expanded viewpoint enables the seller to guide their organization with a more comprehensive outlook, improved foresight, and deeper insights into social and organizational factors and industry dynamics. The broad perspective also helps them mitigate unforeseen challenges that may arise during the process.
An experienced advisor will help shed light on “personal due diligence” – in-depth understanding of why to sell the business and in-depth understanding of what and who are affected as a consequence of this decision.
A trusted executive advisor brings significant value by offering an objective evaluation, which may challenge the owner’s preconceived expectations. An early engagement with an executive advisor helps provide sufficient time for thorough assessments before the M&A considerations. Such an advisor also helps unearth hidden intangible assets, positively influencing the overall deal outcome.
The exceptional nature of M&A highlights the importance of having competent advisors who have requisite experience to provide clarity and insightful guidance. Owners who are aware of the importance of valuation and its attributes as well as backed by sound leadership are better equipped to face the challenges presented by M&A engagements.
Conclusion
Engaging advisors early on makes a difference in realizing outcomes and avoiding unexpected and undesired situations. Trusted advisors play a critical role in M&A transactions, offering objective valuations, uncovering hidden values, and providing strategic guidance.
For mid-sized organizations aiming for growth and success, investing approximately 3% of their revenue in consulting and advisory services proves to be a wise strategy. These services serve to enhance the bottom line, competitiveness, and sales performance. The presence of advisory services brings an outsider’s reflection to the organization as a whole, offering valuable insights and recommendations for improvement. While leadership bears great responsibility in steering the organization, it is essential to provide them with support concerning their accountability to main shareholders, the board, the markets, and society.
Edisto – In Your Corner
As your trusted advisor, Edisto helps balance assumptions and prioritize your specific issues in the M&A process. We help analyze hidden values that may not be formalized in books or markets but can manifest concretely in business operations. As a strategic partner, we act as a sounding board for leaders and owners, providing measured and level-headed guidance. Our early involvement ensures that your M&A process has a full strategy and scope, resulting in better outcomes aligned with your expectations.
