In our previous articles, we broke down the numerous motivations from both a buyer’s and a seller’s perspective morn considering a merger or acquisition (“M&A”). Now it’s time to look at the M&A process.
There are exceptions to every rule, except the rule that there’s always exceptions to rules…
No two collision repairs are identical. Similarly, no two M&A deals are exactly alike. In the more than 100 closed deals that I have participated in (and the few hundred more that didn’t close), there was always a wrinkle, an exception. However, also like collision repair, there are certain steps that typically are followed in every deal – some SOPs. Here’s a breakdown of the major steps in the M&A process, and for those who have had an unpleasant marriage experience, please pardon the analogy:
Beautifying: Just like blueprinting a collision repair job, proper planning is critical to maximizing the outcome of a deal. For a buyer, this includes securing financing, ensuring the existing company is stable enough to function effectively, without the owner for an extended period of time, lining up key vendors, deputizing a deal team, etc. For a seller, the process begins months to even years earlier and is focused on areas such as having clean financials, tightening up operations so that the shop is meeting or exceeding widely-followed KPIs, shoring up key referral sources, vendors, and employees, and performing any deferred maintenance. Savvy sellers also assemble a dream team of advisors (i.e., a tax expert, transaction attorney, and a banker/broker if the deal is sufficiently large), and they perform the same due diligence on themselves that a buyer eventually would do. If there’s a skeleton in the closet, it’s far better for the seller to find it than a buyer.
Courting: Finding a deal means very different things to a buyer and a seller. Buyers tend to prefer exclusive deals, those deals that no other buyer is involved (a.k.a., “non-auction deal flow”). This requires a proactive, disciplined system of regularly contacting potential targets, along with playing an active role in the industry by attending events, like the HD Repair Forum. As for sellers, the process of identifying a potential buyer is very different. Oftentimes, this is left to the seller’s banker/broker; DIY sellers typically reach out to people they know, including peers and competitors. The critical take-way at this stage is to preserve confidentiality. Once the word is out that a shop is for sale, referral sources get concerned and key employees (i.e., those most desirable by your competitors) get mobile.
Dating: Once a few potential suitors have been identified, it’s time to spend some time together. Shrewd buyers will ask for as much data as possible about the seller’s referral sources, financials, customers, employees, and facilities & equipment. Shrewd sellers will already have this package prepared and formatted to tell a story that makes the business look most attractive to potential buyers. This may require different versions if there are multiple types of buyers. Typically, a walkthrough also occurs at this stage so the buyer can assess capacity and necessary capital expenditures to integrate it into its existing operations (Note to sellers: conduct the walkthrough at night!). The buyer’s goal at this stage is to complete a valuation of the business and identify the key deal terms.
Our next article will focus on the latter stages of completing a deal. Stay tuned!
Comments / questions / criticisms? Are you contemplating a deal that might fit into one of these categories and you want to ensure you’re making a sound decision? Feel free to e-mail me: firstname.lastname@example.org – I’m happy to explore the circumstances with you. Our next article will explore the anatomy of a deal. Until then, happy dealing!