While working at Sellside Group, I've gained a great deal of experience in the world of mergers and acquisitions (M&A). The practice is industry agnostic and can occur in any sector. Although M&A deals share similar objectives, each deal is unique. Several factors influence each deal, such as the companies' size, operations, owner's desires, and the economic landscape of the specific industry.
Sellside Group's leadership team is truly exceptional. From our CEO, David Weiss, to our Managing Directors and M&A Director, Jake Kitka, they are dedicated to educating and empowering everyone on the team about M&A. Thanks to their guidance and support, I had the opportunity to play a critical role in a sell-side transaction for a commercial facilities maintenance client in the southeast United States. Working closely with the client and my colleagues, I was able to source a strategic buyer with a robust acquisition-based growth strategy. This transaction ultimately resulted in a successful transaction for our client, which played a key part in my finishing 2022 as the top revenue-generating intern. Here are a few valuable pieces that I learned about M&A:
The M&A Process
Many executives consider implementing an M&A strategy to either grow the value of their business or exit the company, but what exactly does the M&A process entail?
Developing a Strategy
The first piece of the process is developing an acquisition strategy by leadership within the business. While doing so, it is important first to consider the purpose of the transaction—is leadership looking to exit the company, are they seeking a capital infusion through an equity sale, are they positioning to enter a new market, or is the company aiming to offer new products or services? These are all things that need to be considered before testing the market.
On the sell side, leadership should take action to make their company as attractive as possible to potential buyers. A few things they should do are make sure they can clearly articulate the company's culture and the management team's succession. Leadership should also prepare their current financial statements and make adjustments, such as adding back one-off costs or inflated owner salaries, to the EBITDA, as a multiple of the EBITDA is often used during the valuation process, among other tools. After current financials are in order, the company should generate pro forma financial statements to show a positive operating runway to potential buyers. It is also important to consider what type of deal the owner is willing to accept—do they want to stay on board with the company after the sale? Do they want an immediate exit from the company? Do they want an advisory role? How do they want their payout structured? All of these aspects can make or break a potential fit as they can each dramatically change the overall appeal of an offer and are particularly important for family businesses as this can add another level of stress to the process.
There are many similar themes on the buy side compared to the sell side. Leadership should start the process by developing a strategy for the acquisition. Each strategy can look very different based on the company type and the acquisition's nature. For example, a private equity firm may be looking to build out their portfolio in a general industry but may not have the expertise or desire to step into the industry and help run the company, while on the other hand, a strategic buyer may be looking for a particular industry fit as they want to be involved in the day-to-day operations and steer the company in a specific direction. These differences greatly influence the offer structure the company desires to submit. They should also build a budget for the deal. While it is impossible to know the exact transaction cost in the early stages, the company should know how much they are willing to spend. This will allow them to narrow down the companies they are searching for and act quickly, as a company's EBITDA can give them a ballpark estimate of its valuation.
After the strategy is set, the search for potential targets begins. In this stage, privacy and secrecy are paramount as competition can gain useful insight, giving them a strategic advantage. To protect themselves, companies often hire 3rd party firms to represent the company and maintain anonymity while facilitating the search for a suitable target on either the buy or sell side. Typically, the 3rd party company can source and vet potential companies to buy or sell the client company to. During this process, meetings are held with the candidate's leadership and the 3rd party company to determine cultural fit. Once this has been established, the potential counter company will be provided with a non-disclosure agreement (NDA) and a confidential information memorandum (CIM), which conveys valuable information about the client company, such as customer concentration, notable vendors, financial statements, business structure, a market analysis, industry analysis, end market breakdowns, and other information to help determine if the company would be a good operational and strategic fit. A good CIM tells the story of a business and illustrates why it may be an attractive investment.
Following the delivery of the CIM, it may be determined that a site visit is in order. Here, the 3rd party company can organize an in-person visit between the client and counter business so they can get to know each other and better understand how the company operates on a day-to-day basis. After the CIM is reviewed and meetings are held, the buying company will submit a letter of intent (LOI) outlining the purchase price, payout structure, and other terms the company agrees upon to close the deal. The entity receiving the LOI can negotiate the terms of each LOI and ultimately decide which they want to accept.
Due Diligence & Closing
Following the acceptance of an LOI, the purchasing company will go into the due diligence phase, where there is a thorough investigation and analysis of the target company that another company is considering purchasing to assess risks and opportunities and verify the accuracy of information provided. After carefully considering legal documents, financial statements, employee contracts, and customer and supplier relationships, the purchasing company can proceed with the acquisition and determine an appropriate valuation and terms for the transaction.
The final stage of an acquisition is commonly overlooked. Post-merger integration encompasses the integration of two or more companies involving each company's people, processes, cultures, and systems. Without proper integration, the acquisition is bound to fail as there is culture clash and inefficiencies across operations, which prevent the deal's potential value from being harnessed.
Practical Experience: Finding the Right Buyer for a Sell-side Client
I was part of the sell-side transaction for a commercial facilities maintenance client in the United States. The company I sourced, has an acquisition-oriented growth strategy. This type of strategy allows a company to quickly gain access to a new market by acquiring a business already operating in that market and allowing the company to quickly start providing services to the new market that otherwise would take years to implement competitively. These benefits can make an acquisition-based growth strategy more attractive to business leaders than an organic growth strategy. In this case, the company acquired our client and now has a strong presence in a new geographic region. While it may be capital-intensive upfront, the benefits to a company's top line and long-term strategic positioning outweigh the costs of tying up cash or onboarding additional debt.
The Bottom Line
As a business leader, you're tasked with taking all relevant factors of the environment into account and steering the business on a track of growth toward success. Each company has its path and a unique picture of what success looks like to them. The potential benefits of implementing an acquisition strategy are constant across nearly all companies. If performed successfully, an acquisition can allow a company to pivot and overtake competitors, and the transaction can become invaluable to the firm. While this strategy is not for everyone and may not work for every business, middle-market executives are responsible for learning about and considering how an acquisition or exit strategy could impact their business.