Having a preliminary valuation performed by a qualified M&A professional is one way for a middle market entrepreneur to identify the issues in their business that should be addressed, cleaned-up, or improved to make their business more successful and eventually more attractive to prospective buyers. A preliminary valuation analysis will identify the “value drivers” of the business as well as create metrics upon which future successes and/or failures may be quantified. Value drivers may include:

• Customer Base – diversified or concentrated
• Profitability and Growth – steady growth rates or flat and inconsistent
• Competition – barriers to entry
• Management Ability and Depth – not overly reliant on the owners/managers
• Product and/or Service Excellence
• Industry dynamics

A Strategic Plan will be established from the preliminary valuation process, and from this framework, the owner may develop the Tactical Plan to transform the business. With the deliberate execution of the Strategic Plan and 2 – 4 years of leeway, a business owner should maximize the Investment Value of their Company and create a highly-saleable business.

Commonly referred to in the Letter of Intent (LOI), a clause or similar verbiage may be found asserting that, “from the date hereof, until the closing of the transaction contemplated by this LOI, the Company shall conduct its operations only in the ordinary course of business …” What is the definition of the phrase “only in the ordinary course of business” in this context?

After signing the LOI and through the negotiation process, buyers and sellers will have mutually agreed upon the balance sheet targets expected at closing. This clause is a precautionary measure taken to ensure that the seller will not make any drastic changes to the core business and/or its financial structure. Drastic changes may include:

• Significant capital expenditures
• Discontinuation of certain lines of business
• Increasing salaries
• Changing the nature of the business

Having an experienced M&A Team to recognize the nuances and protect your interest in a deal, provides peace of mind for buyers and sellers alike.

Leading up to a transaction, buyers and sellers of companies can’t help but be enthusiastic about the endless opportunities that lie ahead. With all the synergies, growth possibilities and efficiencies to be realized; what’s not to be excited about!?

This Honeymoon phase may continue post-transaction, but as integration becomes a reality, the excitement dissipates and pressures to capitalize on expectations intensify. Although opinions may vary on the approach to post-transaction integration, all can agree; an integration strategy must be established. This strategy should include:

• Unifying management teams behind a shared purpose
• Setting priorities and time frames; aggressively following/adjusting accordingly
• Training staff for immediate concerns
• Monitoring productivity while remaining client-focused
• Anticipating and managing staff turnover
• Addressing cultural issues
• Measuring the impact of all major decisions
• Communicating throughout the process!!!

In order for a transaction to be successful, months of preparation, negotiation and bargaining are required. It’s no surprise that exhilaration typically follows a deals consummation. However, it’s equally important that buyers and sellers understand that post-transaction integration begins on day 1, if not sooner, to ensure the new entity’s success.

When discussing the motivating factors of maximizing M&A sale prices, value drivers are best understood in terms of how they influence either expected cash flows (EBITDA) or the perceived risk (the purchase multiple). The significance of the planning and conducting phases of the sales process can often times be overshadowed from heavily focusing on the supply side, demand side and market value drivers of transaction values. The sales process will ultimately determine if the potential sale price is realized.

There are three types of sale processes:

• Broad Auctions – employ competitive bidding process, used for standalone businesses attracting many buyers.
• Targeted Auctions – most effective when there are identifiable buyers, preserves some benefits of competitive bidding.
• Negotiated Sales – one or two buyers, typically a strategic buyer, may be complicated by the buyer.

Every business and every transaction is unique; the most appropriate process for the sale of a business is determined by market dynamics, the sellers’ objectives, and the number and type of potential buyers. An important step for all sellers and their investment banker is selecting the proper sale process to maximize the sale price.

In conjunction with the future earnings of a business, merger and acquisition (M&A) deals require the delivery of the ordinary and necessary balance sheet of the business to the buyer. The balance sheet should be adequate for the continued operation of the business and exclude cash and long-term debt (the “Enterprise Value”). Due to the variable nature of the balance sheet, sensible targets for cash (if any), net working capital and net assets are customary.

Net working capital, or current assets minus current liabilities, tends to be the most ambiguous and disputed balance sheet target. With significant fluctuations in cash, receivables and payables from negotiation to close and varying definitions of the term, net working capital targets may require further negotiation between parties. Approaches to a negotiated target may include:

• Average working capital for a specified period around the time of negotiations
• Average working capital for a specified period as a percentage of quarterly or monthly sales
• Average working capital from comparable companies in the industry

An experienced M&A Advisor will identify and resolve potential problematic issues early, especially before the signing of the Letter of Intent.