All businesses, whether small medium or large, follow business lifecycle that includes standard phases—Startup, Growth, Maturity, Decline, Rebirth/Innovation/Death.
The duration of each of these steps may vary depending upon various internal/external factors, but the above mentioned phases always apply. Except for the initial startup stage, businesses can get into lot of innovative and strategic business decisions and associations, to enable new expansion, growth, or even for want of survival or complete exit or closure by selloff. Mergers and Acquisitions (M&A) are one of the most important decisions a businesses can make.
While the corporate world keeps reporting news about large size M&A deals and transactions that are supported, brokered and executed by large investment banks and involve large size firms, small and medium sized businesses may find it difficult to identify suitable M&A advisory firms which can assist them in such deals. This article focuses on how small and medium sized businesses can identify the right M&A advisory partners, important information on service offered by M&A advisory firms, what attributes to look for and what steps to follow to get the best dealing partners.
Why and when should small and medium sized firms consider M&A?
Opportunities or necessities drive strategic business decisions. As detailed in the business lifecycle graph above, businesses go through different phases and may need expansion, contraction, partnership, spinoffs or even closure/sale of certain business units or the business as a whole. A sale by one party is an acquisition opportunity for the other.
There can be several scenarios and reasons for a firm to consider M&A:
- To grow business turnover by merging with or taking over a firm in complementary business line
- Increase market share by taking over a competitor
- With surplus cash, more profitable opportunities can be explored by acquiring outside firms for better returns, instead of investing in existing business for comparatively lower profit or generating lower interest income from the idle cash
- A need for survival—loss making, declining businesses may need to make hard decisions to ensure survival. Either partnering with other businesses or selling the business to others may be a better decision, instead of letting it die with a loss.
- Corporate restructuring—usually to restructure the equity and debt so that loans may cost less, thereby bringing in new acquirers or shareholders
Why is it challenging for small businesses to find M&A advisory firms?
- Small business requirements for M&A may be small sized, meaning low deal value and hence less commission and fees for M&A advisors.
- Small businesses may be looking for local/regional partners, and not many M&A advisory firms operate with expertise at different regional levels
- Scope of the small businesses may be limited in terms of products and services alignment between two parties, making M&A difficult
- Knowledge and perspective of business owners may be limited, often constrained by anticipated local targets and partnerships
How can M&A advisory firms help small businesses? Services & Expectations from M&A advisors:
Small business owners may not have necessary expertise and network to find suitable opportunities which can provide the required strategic turnaround. M&A advisory firms can help, as they can assist with their expertise in these areas. The following provides a generic list of services available by advisory firm for any M&A deal. Depending upon the services opted for, the charges and fees may vary. The M&A advisory firm assists in:
- Identifying the counterparties matching the client’s expectations. Using their network, they also ensure suitable promotions or maintaining confidentiality, as needed
- Appointing the necessary professional services, which may include legal and financial services, performing due diligence, etc.
- Valuation of the business unit on the relevant M&A deal; Finalizing a fair expected band for the value of the deal
- Assistance in arranging the necessary finance for the deal, as needed; Providing necessary negotiations and advisory services with the financing firm
- Making an initial offer subject to deal contract to interested stakeholders and counterparties
- Negotiating on the deal with the counter-party (which may in turn be represented by similar M&A advisory)
- Structuring the transactions in terms of scheduling the payments and getting agreements from all stakeholders
- Finalizing legal terms (including contracts, warranties, indemnities) for the deal
- Drafting the terms of the deal—which may include shareholding pattern changes, debt and equity restructuring, etc.
- Assistance in drafting other necessary strategic decisions and schedules—like when to publicly announce the deal in the open market, informing the employees in case the deal results in layoffs, pay cuts or other impacts on employees.
- Drafting the outline of post-integration services across product and service lines, operations, etc.
What's your intended goal and expectations from proposed M&A?
Before approaching any M&A advisory firm, it is very important to do your homework with the most important focus remaining on what you want to achieve from the deal ( purpose). Here are a few important points to consider:
- Which side are you on—Are you looking to increase your market share by merging with or acquiring another firm? Or are you willing to sell off your business to exit? Acquirer would expect lowest possible price, while seller would expect highest bid. Be clear and realistic about your expectations and agree on the same with the M&A partners.
- Are you looking to enter into new markets and expand your market base by M&A route?
- Are you looking to acquire (or merge with) new businesses with an aim to add new products, enhance processes or upgrade technology, to add to your existing product portfolio and/or improve operational efficiency to save costs?
- Is your M&A venture aimed at reducing the operational costs and thereby improve on the bottom line?
- Are you trying to get ahead (by possibly killing your competition) through a strategic M&A deal?
- Have you explored freely available resources like business journals, newspapers and web portals (for e.g. BusinessForSale, BizBuySell), which offer useful information and services about valuing your business, listing available deals and venture which may be extremely useful and relevant to your expectations.
Selecting and working with M&A advisory firm:
For small businesses, a business deal is a once in a lifetime opportunity, which may make or break the entire business. It becomes very important to select the right partners. The following guidelines can help:
- Keep an open mindset; go global; explore all possible options which may seem impractical in the initial stage but can be meaningful to look at.
- Be selective - don’t rush with the first firm you approach, especially if you are looking for the merger/acquisition deal (instead of selling). Remember, selling is easy, as your responsibility ends once the sale is complete and you get your expected price. Merger / acquisition requires a long time commitment for integration and running the business, so ensure that you get the right advisors who can assist you fairly. Shortlist a few firms and assess them further based on the following points.
- Perform a SWOT analysis of the M&A deal on your own, and come up with realistic valuations for the expected deal, before approaching the M&A partners. Such homework will assist in negotiating better with your advisors for deal valuation, their fees and charges.
- When selling a business, most owners trust their accountants for a fair valuation. While it is good for initial thoughts, accountants may fail in other areas like proper marketing, networking and bringing in interested parties to offer you the best prices. Choose an M&A advisor which is well known for these aspects to get you the best price.
- Does the advisory firm has expertise on the markets, regions, products-line, service-line, technology or any other applicable parameters which are the core agenda for your M&A venture? Have they executed similar deals successfully in the past?
- Have the past deals of the M&A advisory firms resulted in success? Were there any legal, operational, financial or other challenges that made news in the market?
- Don’t lose focus of your objectives—is the M&A firm advisory meeting your desired purpose of getting into the M&A deal? Are there any loose threads indicating your M&A partners will get away once the deal is signed, leaving everything onto you? Is the high level structure of the deal proposed by the advisors serving your immediate, short term and long term objectives?
- While working and during initial discussions with an M&A advisory firm, pay close attention to the reasoning and justifications they provide, especially for the valuations. Backed by your own SWOT analysis, be prepared to have realistic and constructive discussions with them on deal size and valuations.
- While selling, the best deals come when you get multiple counterparties competing for your offer—is the M&A firm assuring you minimum number of bids/offers from different counterparties with a minimum threshold amount?
- Selling a business is easier, as long as one gets the expected price. Buying something is challenging, as the acquirer pays a price (which may be expensive) and also takes the long term responsibility to run it further. Assess your M&A advisors based on their past records for continued engagements and how successful they were with their past clients.
- What’s the cost for the advisory service? While many business owners may assume that M&A advisory firms make a cut on deal size as percentage basis for their fees, there may be other charges levied by the advisors. This can include an upfront advisory fee, monthly retainer fee, registration and sign-up fee, etc. Keep a clear account of the charges to avoid surprises.
- Not all quoted services are free; each may come at additional charge. Don’t just trust the M&A advisor websites and pamphlets—rather discuss each point clearly.
- Work with the M&A advisory firm: A good advisory firm likes to see constant engagement, active contributions and involvement from the clients. Leaving everything to the advisory firm simply because you are paying a fee is not advisable, as it leads to important details being missed, assumptions being made and lack of commitment and clarity which ultimately leads to challenges, setbacks and failures in future.
- Post Integration/Acquisition Services: Unless you are on the selling side, it is very important to focus on the integration aspect of the newly acquired or merged business. M&A advisors usually assist in creating a high level integration plan to be executed post the M&A deal. Assess your potential M&A partners for the similar deals in the past, and how effective they have been in getting it implemented.
- Go for M&A advisor, not just a business broker—the job of a broker ends when the deal is complete. M&A advisors work with clients clearly detailing long term plans, structuring and detailing every aspect of business integration.
The Bottom Line
M&A advisory services are available from large investment banks to small boutiques, but may come at a high cost. It is important to assess them on all applicable aspects, for expertise, services, and related factors.
Good M&A advisors, even if engaged for long term, will eventually move out. At the end, it’s all about the owner. One needs to be in control from start to end for the objective of merger and acquisition deals. Constant involvement, assessment and joint working with M&A advisors will not only make the deal clear, smooth and easy, but will also hone the business acumen and skills of the owners for the learnings during the process.