Photography by Shannon Drawe
The first thing to consider when entering a merger and acquisition deal is not how to beat the other guy. Terry Fick says it’s all about positioning your company and yourself to negotiate a better deal. Fick is managing director of Corporate Finance Associates, and at a recent Enlightened Speakers Series event in Dallas, he led a panel on negotiating from a position of strength.
“A good M&A transaction is not a win-lose deal,” Fick said. “A good M&A transaction is a win-win deal.” It’s all about value and preparation, he said.
The Four Building Blocks Of Strength
To negotiate from a position of strength, four building blocks must be in place. First, competition. Fick says a seller wants people competing to buy the business. One scenario he often sees is a company being unexpectedly approached by a buyer. “We’re not for sale,” they might respond, “but everything is for sale at the right price.” Fick says that tells the buyer there is no one else in the game, and the business owner isn’t very sophisticated. “A better approach would be to say, ‘Well, I am considering my options, and if you’d like to be included in these discussions, let me send you a non-disclosure agreement,’” Fick said.
The second building block is information. “Information is the fulcrum of the risk and reward balance,” he said. “If you lower the perceived risk, you raise the value.” The more information a buyer can get, the lower the perceived risk. That means putting any of the business’ warts in front of the buyer. “When the buyer finds the warts, the warts become cancer,” Fick said. Getting the necessary information together could potentially take months, or even years, but the buyer’s questions must be anticipated.
“Can you tell someone what your revenues and gross profits are by customer or by product or by site?” Fick asked. He said it’s important to look at the business through the eyes of the buyer. “Can you look at revenues by market or by product segment? How do you win or lose business to your competitors? How would you recover if you lost a major customer? How large is the US market for your product? What is your percentage of that market? Can you double that business without impacting the market?” Fick said there can’t be too much information — especially financial information.
Growth strategy is building block number three, and the seller must share that strategy with the buyer. “It is your plan to show them how to maximize their return,” Fick said. He suggests getting the company’s management team involved in presenting that information to prospective buyers, and not to worry about potential breaches of confidentiality. “If you can’t trust your management team, you have other issues you need to deal with,” Fick said.
Fourth, the management team. Most owners believe they have a great management team, Fick said. But if they’re great at managing a $25-million business, does that mean they have what it takes to manage a $50-million business? “Just because it works for you doesn’t mean it’s going to maximize the value of your business or that it will work for your buyer,” Fick said. Remember that a major selling point of the business will be its potential for growth.
Put Out The “For Sale” Sign
Where Fick usually represents sellers, Brian Steinbrueck (Stein-brook) of Wingate Partners is often looking to buy. Wingate is a private equity firm looking for the right businesses to buy, with the aim of selling them at a profit six to eight years later. And he had a lot of advice for sellers.
“It’s good to be a seller because there’s a lot of demand,” he said. That’s especially true for businesses that are poised to grow right away. Steinbrueck said the objective of a company for sale is to give multiple buyers “everything they need to go outside their comfort zone.” Financial buyers like Wingate and other private equity firms know they’re going to be stretched, he said, and might be uncomfortable with valuation, the speed of the process and access to the company’s management. But those buyers must also deploy their capital and get a return on their investment — so there’s a balancing act.
Steinbrueck said his framework for value is similar to Fick’s. It includes a strong management team, a business strategy and growth prospects. Wingate sold a specialty paper manufacturer — Dunn paper — last year. The company makes quick-serve sandwich wraps and other paper used in packaging and food products. It had grown organically, showed new products and won new customers. EBITDA was up 60 percent over four years. But the company had only one mill and faced a problem when it came to selling a potential buyer on growth prospects.
They bought assets from a public company, which added five mills to their holdings and tripled their revenue. “This type of a transformative acquisition you don’t do unless you’re very confident in your management team,” Steinbrueck said. Earnings doubled in two years. It was time to go to market.
Some buyers are scared off by businesses with large capital expenditures, large assets and a history of environmental issues, but Dunn found a number of buyers and sold to a group that saw the potential for growth within three to five years. What made it successful? “The team,” Steinbrueck said. “They were a high-performing, complete management team. The new owners could see how they could start to play offense with both organic growth and acquisition growth.”
When adding to the buyer’s store of information about the business, Ryan Bosworth said it’s vital to do some sell-side due diligence. Bosworth is the director of transaction services for RSM US, and works both the buy-side and sell-side of transactions.
“Sell-side diligence puts the seller in the driver’s seat,” Bosworth said. If the seller can provide quality financial analysis and expected EBITDA, that will head off the buyer from coming in with their own view on adjusted EBITDA. “We’re seeing fewer and fewer proprietary deals, and more and more bidding situations,” Bosworth said. “If you can go to market with a sell-side report that paints a picture of what the company’s EBITDA is, it creates that level playing field for all potential buyers to base their bids on. When you do this, you’ve got a leg up.”
RSM did sell-side diligence for the Dunn Paper transaction. They identified $2.8 million in positive adjustments to EBITDA, Bosworth said. “The majority of our adjustments were related to non-recurring items, non-operational items and removing the impact of the fluctuations of foreign currencies from EBITDA. In addition, we identified, with the assistance of management, an additional $6.5 million in pro-forma adjustments.” With an industry multiple of eight to ten times EBITDA, that added $70 to $90 million in value to the transaction.
What Not To Do
The panel also offered ideas about what not to do in a sale. “Don’t go to market without a strategy,” Bosworth said. He had a company doing buy-side diligence when he noticed it had $30 million in revenue and $28 million in accounts receivable. “Let’s get that cleaned up before going to market,” he said.
Steinbrueck said, “You want to budget a strong earnings year when you go to market. Budget a little lower in order to hit your numbers rather than miss. Don’t miss budget, don’t miss your forecast.”
Protecting that important management team can be an issue during a sale, too. “The best way to handle that is to be transparent and have a dialogue with the team,” Steinbrueck said. He said there’s a natural chemistry between the buyer and the management team, and that chemistry is often what makes the deal happen, he said.
Fick said it’s important to include the management team in the selling process. “When you involve your management team, and the buyer comes into the room, you have some power,” he said. “You have erased five or six questions about how this deal can be integrated.” He also suggested setting up a bonus pool, half funded by the buyer and half by the seller. The pool would be equal to a year’s salary for each manager. If the buyer terminates any of them within the first year, they’re paid from the pool. “I see fewer management turnovers after sales than most people believe,” he said.
Finally, which makes for a more lucrative deal for the seller — the financial buyer or the strategic corporate buyer? Fick said the corporate buyers used to outbid the financial buyers, but today it’s the other way around. Ultimately, it depends on what the owner wants from the sale. If they just want to be done, but haven’t done everything that needs to be done (like finding their own replacement) Fick said a corporate buyer is likely necessary. A private equity buyer might not care, because they know they can find someone to take over, but the sale will bring in substantially less money.
“Be patient, and explore,” Steinbrueck said.
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