The M&A Trends & Best Practices panel at this year’s ACCESS Conference brought together a diverse group of thought leaders from across the M&A landscape. We were pleased to have Mark Landry, 7 Mile Advisors Managing Director, lead the panel, which included Rone Reed, Bank of American Private Bank Client Advisor, Elissa Etheridge, Aon Managing Director, and John Cooper, 7 Mile Advisors Managing Director. The group discussed business and personal decisions that business owners need to start making 12 to 36 months in advance of a liquidity event in order to maximize the outcome.
Landry opened the panel with a simple, but impactful statement: “Good business decisions will not only help grow your business, but make a sell-side transaction much easier.” The business decisions Mark was making reference to include:
- Growth
- Sustainable Gross Margins
- Accrual Basis Accounting (versus cash basis)
While business decisions are important, there are a variety of factors business owners must consider before pursuing a transaction. It’s important to prepare your business, yourself, and your family for a liquidity event that often impacts a far reaching group of individuals. A few key themes for planning emerged and are outlined below.
Wealth Planning
Ultimately, business owners are faced with a few big questions when exploring a transaction that will impact their liquid net worth. Some items they should consider with the aid of a private wealth advisor include:
- What’s my next step career wise?
- How will this impact my family?
- Can I live comfortably off the proceeds of the transaction?
- Is there anything specific I want to do with the proceeds? (I.e. charitable donations)
Every sell-side client faces different situations and scenarios; however, most commonly, Rone encounters a lack of emotional preparation by business owners and their families. Selling a business has a huge personal impact and becomes more complicated when a second or third generation is involved in the business. Ultimately, the process of selling a business is never the same in two scenarios, but emotional preparation is crucial. Many business owners understand the process will take a lot of time and emotional commitment, however, fail to realize the extent. Even when planning is done, the sale may not result in the perfect outcome. Rone has worked with a few business owners that decide to start another business after 3 – 5 years of working for the acquiror, as a result of situations changing.
In addition to planning for the emotional and time burden that is inherent with selling a company, Rone touched on wealth and tax planning strategies that families can utilize. Wealth and tax planning strategies, depending on an individual’s circumstances, can be large and complex. Rone recommends utilizing an ample amount of time to plan and implement these strategies. Many business owners wonder when the time to start is – sooner rather than later was the resounding suggestion from our panelists. All too often, business owners who have waited until they are in the transaction process to plan, have vastly limited strategies available to them.
For business owners looking to retire after the sale of their company, Rone’s team works with them to determine their “number.” Their “number” is based on what the family will need in retirement, allowing them to live their life as they did before selling the company. Rone’s team recommends looking at the lower end of the multiples range and removing the transaction earnout, to ensure that an individual and their family are taking the most conservative approach to wealth planning.
Trends In Transaction Insurance
Elissa Etheridge, Managing Director at Aon, provides tailored insurance solutions to companies as they grow or are in the process of restructuring. Elissa recommends all businesses plan well ahead of a potential sell-side transaction to avoid the value of their business decreasing due to risks, escrow, and holdback.
Working with Aon, well in advance of a transaction, allows for advisors and business owners to thoughtfully plan for unpredictable events that may occur; ultimately providing comfort to parties on both sides of the table. Aon has noticed an increase in the use of corporate insurance policies, such as representations & warranties (reps & warranties), employee benefit plans, and cyber insurance, among others. In 2018, Aon saw M&A insurance expansion of 40% year-over-year. Of policies written in 2018, over ⅓ of the policies had limits equal to or less than $10m (with a median enterprise value of $44.6m), while 39 reps & warranties insurance deals represented a median deal value of $1B (1).
Aon expects the use of policies, by companies of all sizes, to increase as the threat of risks in the market continues to rise. The growth in the M&A insurance market has also resulted in insurance companies, such as Aon, tailoring policies and plans to meet the needs of companies looking to sell. One example is the “seller flip” process where an insurance provider will go out on behalf of the seller to price out the market for a sell-side client, ahead of collecting bids. This allows the seller to provide insurance information to potential buyers, informing them of what the seller is looking for in a potential deal. The seller benefits from an insurance provider, such as Aon, taking into account the types of bidders and other factors, leveling the playing field.
Pre-planning Key Business Areas
John Cooper, Managing Director at 7 Mile Advisors and a veteran sell-side and buy-side advisor, has worked with a wide range of businesses exploring transactions. As mentioned by Mark in opening remarks, growth and impressive gross margins are very important, but what provides for these – backlog, conversion of pipeline, and pipeline growth. All of these areas of a business lend credibility in the eyes of a buyer, and can ultimately result in a higher valuation.
Companies that engage in a sell-side process need to remember that they will be treated similar to a public company, as projections and other relevant financial information will be given to buyers on an ongoing basis. As a result, sellers should be aware that growth, Key Performance Indicators (KPIs), a stable history with low financial volatility, and other key focus points will provide comfort to buyers for the next six to nine months. Businesses are also better equipped for the process if their financials are in accrual basis (instead of cash basis), as buyers will likely examine financials this way. The last thing companies can do to help with the process, although not necessary, is provide audited or reviewed financials. Audited or reviewed financials are helpful in determining various metrics such as EBITDA and working capital, ensuring that the go-to-market is done with a thorough review. In more cases than not, a buyer will run their own Quality of Earnings (QoE), however, audited or reviewed financials will help give credibility.
Ultimately, good business decisions will help run a business efficiently, leading to growth, and in return, an efficient sell-side transaction. The utilization of trusted advisors, well ahead of initiating a transaction process, ensures owners plan for the unexpected. Partners such as Aon, Bank of America Private Bank, and 7 Mile Advisors have a proven history of guiding clients through processes that most have never encountered.
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About 7 Mile Advisors:
7 Mile Advisors provides Investment Banking & Advisory Services to the Business Services & Technology Industries globally. 7 Mile Advisors advises on M&A and private capital transactions, and provides market assessments and benchmarking. As a close-knit team with a long history together and a laser focus on our target markets, 7 Mile Advisors helps its clients sell companies, raise capital, grow through acquisitions, and evaluate new markets. For more information, including research on the M&A markets, visit www.7mileadvisors.com.
