Is it Time to Join the Sell Party?

January 17, 2020 | Article

As a business, you have a life cycle. This cycle includes fun steps such as startup, growth and maturity, as well as a few growing pains like decline and rebirth/innovation/closure. One of the ways to continue this cycle is through merger or acquisition, as this allows you to pursue new growth or get a fresh start with new ownership.

Often, organizations believe they are too small for merger and acquisition (M&A) activity. After all, business media often reports on large size M&A deals and transactions, supported, brokered and executed by investment banks. The names of the organizations involved sound familiar as they often appear on a little list known as the Fortune 500.

However, merger & acquisition can be a viable tool for growth in smaller sized businesses.

Why You Should Consider Mergers & Acquisitions
The reasons for deciding to sell in any merger or acquisition is similar, regardless of size, geography or industry of a business.

Here are a few common reasons why firms consider M&A:

  1. The owner(s) would like to exit the business by passing on the operational responsibility to family, the management team or an outside buyer.
  2. Desire to combine with a strategic competitor or similar company to gain market share or to create synergies and increased profits.
  3. A need for additional capital to continue growing, innovating and expanding.

The Benefit of Pursuing Mergers & Acquisitions as a Small Business

The reasons for M&A activity can be applied to any size company. Now, more than ever, owners and managers of lower-middle and middle market should consider the benefits of using the M&A space as a means of building wealth.

Middle-market companies are typically defined as firms with $50 million to $1 billion in revenues. Lower middle market firms are defined by $5 million to $50 million in revenue.

This is occurring because of a few things:

  • Record-high multiples and all-time high selling prices which are being driven, in part, by unused capital. This capital is used for investment by Private Equity Groups.
  • Strategic buyers looking for strong add-on businesses. There is a shortage of high-quality sellers. We know there are solid companies operating in the lower middle market without an exit plan. Those without an exit plan are either hoping to live forever or are fine with the company dying when they do. Even those that are contemplating a potential sale are often unsure of how to go about it. We understand selling your business can be a daunting task filled with change, emotion and uncertainty.
  • The increasing EBITDA margins of smaller companies. Largely through the use of technology, smaller companies have been able to post high margins. This allows companies with lower revenues to still attract private equity attention.

Timing and Planning for Business Sale
Merger and acquisition activity is important to consider, regardless the size or industry of your organization. Buyers are looking for management who know what they’re doing and defendable growth projections. You can easily have these, regardless of your size.

There is no formula or magic metric that can define the ‘perfect time’ to begin looking for a buyer. Rather, you must look at your own long-term business and personal financial goals. This will be your trigger to join the M&A party. But we will caution you with this. The transaction process is more than just a snap of your fingers. It’s complex and time-consuming. So, start planning early.

Exit planning has many moving parts. Check out our comprehensive guide to learn about the four common stages of exit planning.

The Importance of Planning & Implementation in Mergers & Acquisitions
The merger, acquisition and divestiture process typically focus on the transaction deal and negotiations involved. Often, the implementation portion is a second thought or prepared for after the fact. However, an implementation that includes a structured plan, defined process and comprehensive communication plan will impact more stakeholders and often times be the measure of a successful deal. Planning and preparing for each of these three significant items and the on-going management requires tools, experience and leadership.

Structured Plan
First, the importance of having a plan for what the organization's world looks like after the merger, acquisition or divestiture will lay the groundwork for the future vision. This plan can include a detailed business plan for the impact and expected result of the process and should provide an organizational chart or design. An unknown plan inhibits decision-making as leadership and teams are left with questions on scope changes or empowerment changes.

Defined Process
Second, it is essential to define a process that will address the gaps from the current state to the future. The structure of this process should include identifying resources and tools that will be utilized to facilitate the changes. The formality of the process is independent of the size of the organization and should be based on need or organizational complexity, including geographic span, number of functional areas and internal resources to manage. Creating a process that includes timelines, milestones, guidelines, status reporting, sub-group definitions and decision-making structures eliminates an environment flooded with uncertainty.

Communication Plan
Finally, a successful plan and process will be ineffective without the communication plan. A successful communication plan should start with a stakeholder analysis to identify the needs for each stakeholder cohort. After this analysis is complete, a robust plan can be created that outlines the timing, delivery mechanism, and process for each communication from start to on-going management of the new organization. A structured communication plan enables communications to be fluid and predictable throughout the transition, while enabling the communications team or leadership to react to unforeseen needs without losing the structure.

Start Planning Early for Your Sale
Selling a business, especially through mergers and acquisitions, will take time, planning and careful consideration. Not only will you need to find the buyer, but you’ll also need to work through a detailed implementation plan. By planning early, you can ensure you’re protecting what you’ve worked hard to build, and truly seeing your value realized.

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