The majority of SME owners are likely to exit the business sometime in future, after realising the expected value of their companies is closely related to the process of preparing for that moment. In a nutshell, the M&A process is about marketing the company to its potential buyers based on its value. This includes both the financial benefits of the company and strategic ones related to that particular sector.
Although some business owners plan market exits well in advance, a company can be approached anytime by potential buyers and if the owners are not prepared, the lack of readiness will almost certainly have an impact on the price of the business.
It is best to prepare in advance. Start from getting the due diligence done, making sure that the business is almost ready to go through the transaction. Otherwise the company would have to get a large volume of data assembled and prepared in a short period of time. If any elements of the data are mismatched, this will undermine the confidence of the buyers and influence the price.
Taking on a professional CFO or FD experienced in M&A transactions could be instrumental in helping the businesses achieve an optimum price. For example, during my time with General Electric, we were considering the buyout of US specialists in radical breast ultrasound technology. Although the business had less than $5m ($3.28m) annual turnover, we bought it for many multiples of this sum, meaning that the price was much greater than revenue. That very high sale price was achieved for a number of reasons.
The company took on a CFO experienced in M&A a year before the transaction took place. He did the due diligence process and was aided by the rest of the team only when required. This meant that the rest of the team carried on the business as usual and maintained sales and normal operations throughout the transaction process. The CFO was the main point of contact for the buyers and answered all their potential questions – which should be managed very carefully. He also conducted the contract negotiations and closure processes.
In the run up to an M&A deal, I would recommend taking on a professional CFO to begin a due diligence process up to two years before the transaction. During this time, the CFO would be able to assemble all the necessary documentation, including financial information and other data, such as intellectual property, legal and HR information etc. The FD would also make sure that every document tallies with other information about the company.
A lack of consistency in financial data can be very dangerous for a company since this could undermine the trust of potential buyers. Financial data has to agree with audited accounts and financial accounts which will be presented to buyers, as well as a pro-forma account that would describe the forecast for the business.
Price drivers – a forecast and business synergies
The forecast for the business is the key element driving its price. The forecast information should include synergy benefits: synergies of globalisation and sales synergies facilitating cross-sales – so a new buyer can sell their products to the company’s existing customers – and vice versa. Product development synergies are also important, as the combination of two technologies can create products with greater market potential. The CFO, who is commercially aware and has been through the process before, should identify as many synergies as possible and be able to explain why the buyers will benefit from them.
He would also be to create a credible forecast that makes commercial sense for people in different areas of the buyer’s business, including marketing and sales.
Moreover, a CFO would be aware of the cost synergies that could be shared by the potential buyer – cost savings that could be realised by combining the company’s processes with those of the larger business. For example, you may be able to make savings on administrative staff since the buying company already has these functions.
A CFO experienced in M&As will also be able to advise the company on what kind of support they need before entering the M&A process. This could mean finding relevant legal advice, such as intellectual property lawyers, and the work that needs to be carried out before selling the business, such as health and safety analysis or employment contracts negotiations etc.
Business as usual
It is important to continue with business as usual during the M&A transaction process. If the company fails to hit its sales targets during that period, the buyers will view this as a risk to the forecasts, arguing that this is indicative of the company’s lack of reliability. Since the forecast drives the company’s value, a failure to hit targets will negatively impact the valuation.
Keeping an emotional distance
It’s important that the management of the company is not emotionally involved in the M&A process and they are able to be level headed during the negotiations. Owner mangers of the business often overestimate the value of their business and take criticism personally during the due diligence process. This usually starts to affect their dealings with potential buyers.
It is useful to have someone who has not been involved with the business to run the process, such as a CFO who can make dispassionate and pragmatic decisions and explain them to the owners.
For example, GE was attempting to acquire a European bio-tech company and the deal was lost because the CEO was too attached to the original price. When fundamental problems relating to manufacturing processes were identified in his business, that would increase the cost of the products and compromise the company’s profitability, he was unable to reduce the price. Consequently, the deal failed.
After the closure of an M&A transaction, the success of the post-merger integration of the company into a larger business depends on the quality of relationships built during the sales process. In many successful deals, the CEO and other members of the management team are likely to find out that their professional prospects improve when they become part of a larger business. Their ability to maintain good relationships during the sales process helps them personally and improves the prospects of their business in the new set up.
Simon Peace is FD and company secretary of Numitas.