Key Concepts for Successful Deals
acquisition (M&A) transactions can be a viable alternative for
accomplishing a number of strategic objectives in the context of
building and realizing value for emerging growth and middle-market
companies (those from startup to several hundred million dollars in
revenue). Let’s take a high-level view of the buy-side and sell-side
processes, and a framework for thinking about and planning each.
many instances the distinction between selling a company (i.e. an
“Exit”) and raising capital is measured by the amount of equity sold
and the contractual rights obtained by the buyer. Financing growth
raises the issue of long-term shareholder objectives, which many
times involve eventual liquidity. As the wave of business
transitions driven by baby boomers planning their legacy and
succession continues, some shareholders are confronted with a
multifaceted decision of how to finance the continued growth of
their business, create liquidity for their owners, and lay the
foundation for operations independent of the owner/founder.
Others see the
opportunity to buy-out partners or create some liquidity while
staying in the game for what may be deemed a second bite at the
apple. This is the concept of selling a controlling interest in a
company to a financial buyer (i.e., a private equity group) and
rolling over or keeping
a minority interest until a subsequent sale or liquidity event
happens when the company is expected to have grown in value (under
the watch of the new owners with their capital). There are numerous
examples where the sale of the minority interest in the follow-on
transaction (three to five years from the first transaction)
resulted in as much economic gain as the original sale to the
partners may find a full or partial Exit attractive for many
away the risk of having too much personal net worth in a single
risk of growth by obtaining a financial or strategic partner.
Buying-out passive partners and
making room in the capital structure for management and
employees without dilution to exiting active shareholders.
solutions exist, including recapitalization, sale to a financial
buyer while keeping a minority stake, or an outright sale to a
strategic or financial buyer with contractual rights for some level
of future performance; and there are many variations.
recapitalization will involve a lower cash-out (as a partial Exit or
staged Exit) for the active owners than a buyout (which involves a
change of control). A recapitalization will most likely be focused
on changing the relative mix of debt and equity with an eye toward
the growth objectives of the company and the required go-forward
capital. For example, a leveraged recapitalization will most likely
increase the debt of the company in exchange for distributions,
dividends, or purchase of equity.
meet a number of goals if approached and executed as part of a
long-term strategy. Some of the typical reasons executives pursue
To enter an
adjacent market space.
To expand into
a new geography or obtain a physical footprint in a new
To access new
the pool of talent and capabilities.
To complete or
augment a product or service line.
To prevent a
competitor from gaining these advantages.
The first phase of
a typical acquisition process will addresses finding a target
company to buy; this begins with the strategic plan that should lay
the foundation to determine many of the parameters and the focus of
the process. The second phase of the process is to structure the
deal, close the transaction, and integrate the business.
strategy to support the acquisition should initially be thought of
in the context of the overall acquisition process and be defined as
part of the acquisition strategy (phase one), understanding that the
process will evolve and is somewhat iterative as knowledge is gained
from the marketplace. If your company is cash flush or the
acquisition target is immaterial in value, the financing strategy
may be as simple as funding the transaction from operational cash
flow or cash reserves. However, if the deal requires external
funding, management must consider a financing strategy, which
typically begins with understanding the acquiring or buying company.
valuation and financial strength.
financial objectives and benchmarks for vetting possible
parameters around how much the buyer can afford.
internal discussions around an ideal or preferred deal
relationships with financing sources and obtaining buy-in
regarding the acquirer’s plans.
evidence for potential sellers of the buyer’s ability to finance
and close a deal.
parameters, management can then think about financing a specific
target company …which is a function of the value of the target,
likely cash flow of the target, the deal structure and the
Start by assessing
the value of the target acquisition as a stand-alone business using
traditional valuation approaches; then value the acquisition in the
context of your business giving consideration to cost savings and
lift that may be obtained on a combined basis. Another metric that
may be useful in the process is to determine the financeable value.
This is the amount that can be paid using external financing based
on the assets and cash flow of the target.
The deal structure
and financing strategy are developed by weighing a number of factors
to find the optimum solution to meet the objectives of the parties
involved. Among other things, these factors include the integration
strategy and the valuation gap…that is the value that your company
is willing to pay and what is required to get the deal done.
keep in mind some core concepts as it takes an objective view and
embarks on the acquisition process –
Begin with the
end in mind; set clear objectives and benchmarks to gauge
attractiveness of potential target companies and particular
financing strategy up-front and establish relationships with
likely sources of financing.
likely more important than absolute valuation.
financing strategy with the operating/integration plan and deal
Focus on value
Regardless of the
eventual solution or desired outcome, start with the same process.
The essence of the front-end steps in the selling or financing
process is analysis and understanding of the shareholders’ and
company’s objectives, financial and competitive position, growth
strategy and initiatives, and valuation.
Keep in mind that
whether selling the entire company or raising a tranche of growth
capital (in the form of debt or equity), what you are really selling
is the future cash flow of the business. While past performance
provides credibility to management’s claims, future cash flow is the
foundation for valuation and usually the primary reason for buying
or investing in a company.
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Kenneth H. Marks.
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