Whether you are selling your business or buying another, one of the first steps is to assemble a professional team to assist you in completing a transaction.  Like any team, there is potential for overlapping responsibilities and/or gaps that can dramatically impact the speed and ultimately the outcome of any transaction.  Negotiating a deal with a counterparty is further complicated by the composition of the opposing party’s team, and is often undertaken against a backdrop of distractions, competing motivations, and sometimes self-serving interests.

At the very least, every transaction requires a competent business lawyer to draw up the agreements, perform title searches, litigation searches, etc.  The key, however, is to select an experienced M&A lawyer that understands the entire process and how to get deals done.  Negotiating the Purchase and Sale Agreement (PSA); particularly the representations and warranties, and indemnity clauses requires compromises between the buyer and seller.  When there is legal counsel on both sides with deep M&A experience, those negotiations often go well.  When one, or worse, when both have little M&A experience, it often leads to the insistence by one or by both parties, of overly protective risk mitigation clauses resulting in a failed close, despite being a commercially feasible transaction for both parties.

There are also a host of tax-related issues that arise from an M&A transaction, and therefore getting a professional and experienced tax advisor is also critical.  They need to be well versed in the latest tax issues and must be able to work closely with the legal team to structure the deal to minimize the tax implications for their client.  As is the case with the negotiation of the legal terms in the PSA, what is good for the seller is often not good for the buyer, and vise versa, so they need to be able to understand “market norms” and find the best compromise for their client.
Besides a good lawyer and tax accountant, there are key members of the management team that will need to be involved.  In some cases, your internal resources, tax accounting expertise, and experienced legal counsel will be all you need to close a deal.  There are times, however, when the buyer and/or seller is well-advised to broaden the outside team further by hiring an M&A Advisor/Investment Bank and/or a Transaction Services Firm.

When a client hires an M&A Advisor/Investment Bank to help them sell their business, one of the most important areas in which they add value is by running a professional, competitive process, that often generates multiple offers, for which the seller might consider.  More buyer competition can often lead to better terms and higher valuations for the seller, plus it creates the necessary competitive tension and urgency to push potential buyers to act.  As a professional that is in the market daily, constantly talking to CEOs and investors, they use their industry and M&A experience to help formulate the go-to-market strategy that best meets their client’s goals and objectives.  With an intermediary, emotions are eliminated from preliminary discussions and important relationships are preserved.

The sell-side M&A Advisor works with management to prepare the marketing materials and handle the preliminary discussions with potential buyers to qualify them, so that management can stay focused on running the business. They help the management team prepare for the deep due diligence most buyers require by building and managing the data room and keeping the complex discussions with multiple parties organized so that the best candidates are filtered through the process funnel during the initial bidding stages.  They help the seller screen the initial bids and prepare for management meetings with select buyers and negotiate a Letter of Intent (LOI) with the best buyer.

Once an accepted LOI is in place, the M&A Advisor/Investment Banker’s role tends to transition to “Project Manager”.  A good analogy might be is that they act as the general contractor for a complicated construction project.  They make sure the plumber’s work is coordinated with the electrician, for example.  A good M&A Advisor knows the boundaries of where one professional’s expertise ends and another’s begins.  They make sure the deal is moving forward, due diligence is completed, and are motivated to close the transaction, under terms and conditions that are in their client’s best interests.  They use their considerable experience in M&A to creatively solve problems during the complex negotiation process, and almost certainly increase the probability of a successful close.

On the buy-side, the M&A Advisor’s role can range from simply supporting a deal by conducting a market and business valuation of the target to aid in the preparation of a competitive bid to a full search and buy-side role, whereby the M&A Advisor becomes an outsourced corporate development extension of the client.

Of course, the buyer's banker may or may not be an important member of the M&A team, depending on how the deal is financed.  Even when no bank financing is needed, it is always best to keep your banker in the loop, as an acquisition will often mean a material change in the business and it operations.

Sometimes, it is advisable, for either the seller or the buyer to hire an independent Transaction Services Firm.  The Transaction Services Firm (usually an accounting firm) is hired to conduct a Quality of Earnings (Q of E) Review.  A Q of E analysis is a detailed review of the company’s financial statements, its revenue, its expenses, etc. to determine the accuracy of its historical earnings and its sustainable cash flow.  It is especially important in M&A transactions that have numerous EBITDA adjustments or related company transactions.  It is becoming more common for buyers to routinely hire a Transactions Service Firm as part of their financial due diligence process.

Some of the larger “full-service” Investment Banks insist that their sell-side clients use their internal Q of E team in advance of going to market.  Like a buyer sponsored Q of E, it sometimes has a place for the seller to initiate the review as it will build a credible story around any financial adjustments with buyers during the process.  However, there is a strong case to be made that the Investment Bank and the Q of E service provider be independent. Q of E analysis fees are a billable service and just like legal and outside tax advisory services, they should have no incentives in place to close a deal.

Finally, sellers should seriously consider hiring a wealth manager to assist in making the best tax-effective use of the sale proceeds.
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Whether you are a potential buyer or seller, M&A transactions can make or break companies.  It is critical that business owners carefully consider all their options on who and how they assemble their M&A team.

​After years of working in M&A and countless conversations with entrepreneurs exploring their exit options, you start to notice patterns.

Recently, I ran into a situation that is common enough to be given a "name" - I call it "The Perpetual Valuation Gap".

That's when, after extensive discussions with a potential sell-side client and a detailed review/analysis of their business, you conclude the business is worth "X".  In this case, let's say $10 million. But the owner thinks it's worth $20 million.  So you part ways amicably and promise to keep in touch.  After all, if you can't come to some level of consensus on value, then running a professional, competitive sell-side process on behalf of a client will be a huge waste of everyone's time (and money).  Of course, there is always an outside chance for an "above market" deal, and no one can consistently predict the outcome of a sell-side engagement.  However, with years of experience, we certainly can judge the probability of a successful outcome.

So after a few years, you reconnect with the owner and conclude it is finally worth the $20 million they thought it was worth years before, but now the owner's valuation expectations are $30 million. Sometimes this pattern keeps going and the business never sells and they never engage, because you won't tell them what they want to hear. In some cases, the owner continues to field inbound inquiries from buyers, but the discussions rarely proceed very far.
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On occasion, they find an M&A Advisor that runs a full sell-side process that usually ends in disappointment.

In my humble opinion, the last thing you ever want to do is to put the business out there to test the market and end up in a failed process.  Unless the circumstances are easily explainable on why the business failed to sell, or there is sufficient time between the failed process and any new marketing initiatives, it is likely to be considered "poisoned" by some buyers that would otherwise be serious contenders.

The adage that "if at first you don't succeed, try, try again" does not apply to the Sell-Side M&A process!

Every seller wants potential buyers to understand the future potential of the business, and every M&A Advisor representing them needs to be able to paint a clear picture of the value proposition with potential buyers to drive the competitive process.

The best outcomes are when there is consensus on potential value, the business is properly prepared for a sale, it is marketed professionally, and when there are properly structured incentives in place to create alignment between sell-side advisor and client.

Eric Bosveld, B&A Corporate Advisors

Myths about private company business value abound in the private capital markets.  Part of the reason for this is that there is often very little data to make accurate comparisons, or when the information is available, it is either out-of-date and/or there is little contextual information available.  Another reason is that business value is not something most business owners think about regularly as they are often not talking to buyers, private equity groups, and other types of investors daily.

While precedent transactional data and non-publicly available deal insight by M&A advisors can be helpful, it is only part of the solution.  Most buyers will spend considerable efforts to build out the financial models to carefully assess what a potential business is worth to them, and act/bid accordingly.

This blog article addresses some of the common myths business owners often have about how a buyer will value their business when they put it up for sale.

Myth #1 - The more valuable the business’s assets, the more valuable the business
While quality assets are a component of a business’s value, it is their ability to generate cash flow that drives value.  Cash flow can be used to reinvest and grow the business, pay down debt, or be paid out to shareholders.

Typically, asset-light businesses trade at higher multiples than asset-heavy businesses, for the simple reason that cash flow is not tied up in replacing assets as they wear out.

Owned real estate can be an exception.  It can also be a tricky component of the valuation assessment, as sometimes the value of the real estate has appreciated over time, but there have been no corresponding rent or lease expense increases that are based on the market.  A highest and best use assessment of the property may indicate that most of the value of the business is in the real estate itself, rather than the operating business.

Myth #2 – Industry-standard EBITDA multiples or “rules of thumb” metrics can establish business value
Average multiples or “rules of thumb” metrics can, at best, crudely estimate value, and really should only be used as a “check” once a proper valuation assessment is made.  By definition, an average means that most businesses are worth more or less than the average.

There are dozens of interacting factors that are unique for each business that impacts the future cash flow it can reliably generate, and therefore its value.  Two companies with the same sales and the same EBITDA may be worth entirely different amounts based on differences in customer/revenue quality, supplier relations, location, etc.

Myth #3 – Enterprise value equals equity value
Private company M&A transactions are normally on a cash-free, debt basis, regardless whether it is structured as an asset or share deal.  In other words, the buyer will pay the seller what they think the business is worth to them (the enterprise value), but the seller will have to use the proceeds to pay off any debt, including lines of credit, term debt, loans from shareholders or related parties, tax liabilities, etc.  On the flip side, if the business has no debt and there are cash or cash equivalents on the balance sheet, the seller normally will keep the cash, or it will be added to the purchase price adjustment at the close.

The enterprise value equals equity value myth is most common when the buyer’s offer is to acquire the shares of the business.  Of course, there are situations where a buyer purchases the existing shares of another shareholder and thereby assumes its pro-rata share of any liabilities, including debt.  This is more common in minority deals, or when the debt terms are more favourable than what a buyer could obtain on their own.  But remember, the pro-rata share value does not equal the pro-rata enterprise value.

Myth #4 – Working capital assets such as inventory and receivables are added to the business value
The logic here is how can a buyer know the inventory and receivables value if they are changing daily.  Therefore, they must be added to the purchase price at close. The truth is that current assets used to operate the business are part of the business value, however, they are offset by current liabilities such as trade payables, prepaid operating expenses, etc.  In other words, it takes a certain amount of working capital to operate the business, and the enterprise value includes an appropriate and negotiated amount of working capital, regardless if it is financed by a line of credit or cash on hand.

The exception may be for very small “main street” type businesses where the owner sells the business plus the inventory on hand at close at cost.
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There are lots of other myths out there that we will address in future blog articles.

​In a Harvard Business Review article, entitled "The Secrets to Successful Strategy Execution", "information flow" and “clarifying decision rights” are identified as the most important factors in determining whether a business is effective in executing its strategy.  In our last blog article, we provided some tools, insights, and ideas that can help improve information flow and ultimately drive business enterprise value as it executes its strategy.   In this week’s blog, we address how “clarifying decision rights” inter-relates with “effective information flow” and a business’s strategy implementation effectiveness.  The most valuable businesses are those that have a clear strategy that is implemented effectively and where everyone has a good idea of the actions and the decisions for which he or she is responsible.

People make day-to-day decisions based on their level of authority and on the information they have available to them.  In every business, there are hundreds of decisions made each day or even every hour that may or may not align clearly with the intended strategic direction of the company.  The blurring of decision rights as a company grows is a common problem and can create paralysis where no one decides or when everyone seems to have a say.  Even worse than paralysis is when conflicting decisions are made inadvertently.

Having well-defined decision rights as part of a detailed job description along with specific goals and objectives for each employee is a critical starting point.  This will help identify areas in which there are gaps and/or overlaps in responsibilities and where clarification on decision-making rights may need to be reviewed. This alone, however, will do little to ensure clarity on decision rights across the company.  Neither will be making changes to a company’s hierarchy or organizational structure.

The way to make progress in clarifying decision-making rights is to proactively, systematically, and deliberately figure out how the decision-making process can be improved in the business.
One technique outlined in an article published by Deloitte is to simplify, define, and communicate what, how and who makes decisions by using a Responsible, Accountable, Consulted, and Informed (RCAI) framework.  This can be applied to new hires, customer pricing terms, new marketing initiatives, product launches.  Of course, the bigger the decision, the more clarity required.  It is best to start with the decisions in which there is the greatest ambiguity, and which can have the biggest impact on the company’s strategic goals.

First, decide who is Responsible for carrying out the actions tied to the decision.  Next, determine who is Accountable.  This should also the person (or group) that makes the final decision, and all involved should know who this is.   Some people should be Consulted for their input, along with a consultative process to ensure the best decision is made.  Finally, there are those in the organization that should be Informed once a decision is made. This could include people in other parts of the business, including those in lateral, senior, and junior roles.

A similar framework is outlined in a Harvard Business Review article, called RAPID – Recommend, Agree, Perform, Input, and Decide (although not necessarily in that order).

The key is to make sure everyone knows what decisions will be made by who and how they will arrive at those decisions.  Without a defined framework, many that are asked for input may become disenfranchised when decisions contrary to their input are made.  Often people are confused about the difference between responsibility and accountability.

As the company grows and the team gets larger, with more cross-over in responsibilities across functions, the information flow tends to weaken and the clarity on decision rights gets foggier.  Ultimately, the best decisions are made by competent people with the right information at the right time, but only when they have a clear understanding of the business strategy and with a well-defined decision-making framework.
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Always keep in mind that the most strategic companies are often the most valuable companies.