Deal Making

How to Prevent Critical M&A Deal Breakers

August 15, 2018 By Dr John Binkley - Generational Equity

When Dr. John Binkley and his associates at Generational Equity read PitchBook’s latest quarterly report on global M&A activity, there was plenty of good news.

The M&A market worldwide continues to be highly active – in 2Q, 4,735 transactions were completed in North America and Europe, totaling around $988 billion. While the number of deals fell slightly from 1Q’s number (2 percent), the overall value increased a remarkable 24%, bolstered by several mega deals and continued economic optimism in most industries.

“The M&A market is inexorably linked with business sentiment, corporate fundamentals and macroeconomic forces that can impact factors like access to financing. With all these indicators continuing to trend positively, the global M&A boom shows no signs of stopping.

“Altogether, 2018 is unlikely to eclipse the record-setting numbers achieved in 2015, but it is on pace for another $3 trillion+ year.” – PitchBook 2Q 2018 M&A Report

M&A Activity at Record Highs… But Broken Deals Also Rising

This reinforces what Dr. Binkley and Generational Equity have been saying for quite a while, that this is the strongest seller’s market in M&A for decades. The favorable economic conditions and vast amount of capital in the market right now have driven valuations up significantly. It’s unquestionably one of the most exciting markets in recent memory.

The M&A Seller’s Market is Heating Up

However, alongside this engaging report by PitchBook was another stat that Dr. Binkley felt warranted further discussion. By analysts’ estimates, a total of $541 billion in global M&A transactions has been withdrawn in 2018 so far, representing a 23% increase YOY. A number of high-profile deals driven by this excellent M&A activity have broken down, while several others are in a precarious situation.

Of course, breakdowns in negotiations in the M&A industry are hardly new. With the sale and acquisition of businesses at any level tied to so much capital, it is inevitable that the pressure and importance of securing a good return on investment for buyers leads to deals going no further than the negotiating table.

Many factors can make or break a deal, both on the buying and selling side. Everyone is after the most value possible, and some are more unwilling to make the necessary concessions. If you aren’t prepared for the emotional rollercoaster that the exit process and negotiations present, you leave yourself open to issues arising at the 11th hour that cause deals to break down.

As PitchBook’s report suggests, this is happening all too frequently in recent years. This could simply be an expected result of the accelerated activity in this thriving seller’s market – more deals in total means that more deals are left incomplete. However, it is very likely that many of these non-completed deals were completely avoidable, and could have been salvaged.

There’s an old saying in deal making – a deal is not a deal until it dies twice. As Dr. John Binkley has experienced numerous times since founding Generational Equity, factors that cause M&A activity to break down can often be overcome with the right knowledge and professional support.

Here, Dr. Binkley outlines what he considers four key M&A deal breakers, and what you and other business owners can do to help prevent them when you choose to exit your company.

4 M&A Deal Breakers… And How to Overcome Them

1) Accurate, Honest Documentation

First and foremost, it is essential to get your numbers in order. The level of documentation buyers expect when they acquire a company is unfathomable to anyone who hasn’t been through the process before, and it needs to be accurate and honest.

Inaccuracy can be one of the biggest roadblocks to completing a deal. This plays a big role in the trust between buyers and sellers – if buyers notice any mistaken figures in either your historical or projected financials during due diligence (and they almost certainly will), then this can stop negotiations in their tracks and leave you scrambling for answers.

Innocent mistakes can be forgiven – deliberately misrepresenting your figures is more likely to cause an irredeemable breakdown in trust. While the temptation to alter or overstate numbers to hide any flaws and push up your company’s value can be strong, in Dr. Binkley’s experience honesty is the best policy. With the thoroughness most professional buyers apply to due diligence, your odds of sneaking in erroneous information are slim.

Presenting your company as it is to buyers, with explanations prepared for areas that could be considered concerning, is far more likely to build trust and keep negotiations going. The need to have accurate documentation is also a very good reason to hire an M&A firm to represent you. The first step in the proven Generational Equity process is a complete and thorough evaluation of the client’s business, including the recasting of the historical financials, a critical step in the evaluation process.

2) Seller’s Remorse

Selling a business can be an emotional experience, as it represents the end of a chapter in an owner’s life. Not handling that emotion has been is the cause of many deals not closing, as sellers realize that they aren’t quite as ready to make the next step as they first thought.

While everybody has a right to change their mind, this could cost you substantial time and money in negotiations, and give you a bad reputation when you are ready to sell (and open your business up to breaches of confidentiality).

So, long before you enter negotiations with your preferred buyer, make sure you’ve asked yourself these questions to test your readiness:

Why do you want to sell?
Have you discussed the reasons with your family?
Do you have plans for life after business?
Are you ready to see your company in the hands of someone else?

3) Poor Deal Structure

Often, the deal structure and schedule for acquiring a company isn’t as straightforward as a one-off cash payment. With M&A deal structures like earn-out agreements and others now commonplace, there is potential for negotiations to fail if one side wants an immediate cash payment while the other supports a more gradual, contingent payment structure.

Overall, Dr. John Binkley and Generational Equity’s dealmakers advocate for as simple a deal structure as possible. Cash is king in the M&A industry, and this helps to ensure that both sides of the agreement understand its terms and can move onto their respective next steps.

However, with so many approaches to structuring mergers and acquisitions today, it is unwise to be completely rigid in your approach to negotiations. If you can keep it simple, that’s greatly preferred, but both buyers and sellers in this age need to stay flexible in options, while strong enough to push the approach they prefer.

There’s no hard-and-fast answer to avoiding this potential deal breaker, but it’s recommended to have an experienced advisor at the negotiation table that is familiar with balancing this sticking point. This is a key service that Generational Equity deal makers bring to every client engagement. They have the experience to negotiate deals that meet the financial needs of the client, even if it means withdrawing a deal where the buyer is not willing to negotiate the terms.

4) No Professional Advice

Finally, a major reason why M&A negotiations break down is a lack of professional advice. Most business owners will only exit a company once in their life, and therefore will be unfamiliar with how the M&A journey works. While they may be shrewd negotiators in their own industry, this often represents a very different environment.

Research by Intralinks into abandoned acquisitions has demonstrated that the number of legal and financial advisors retained by both sellers and buyers were the fourth and fifth biggest influencers of whether a deal would fail or succeed.

Professional M&A advisors, like the team at Generational Equity, have been through these negotiations many times over; they understand the obstacles in completing deals and how to best overcome them. Their experience in successfully closing transactions can prove priceless in keeping negotiations flowing and towards an ideal conclusion for both parties.

Avoid M&A Deal Breakers to Make the Most of Your Exit Plans

PitchBook’s insight into the value of M&A activity that have failed to be completed in 2018 should be a wake-up call to business owners considering their exit strategy. With such significant value in the balance, it can be all too easy for negotiations to fail from completely preventable situations.

Dr. John Binkley hopes that this insight into four M&A deal breakers and how business owners can avoid them will be beneficial when you decide to exit your company. Most of these circumstances can be avoided with the right team and expertise surrounding you, so make sure you contact a professional M&A advisory firm like Generational Equity to help you navigate the most challenging aspects of negotiations and the overall exit process.

If you’d like to learn more about potential deal breakers, negotiations for selling a company or other important aspects of exiting a business, visit Generational Equity’s insights page for regular, up-to-date guidance.

How Can Your Business Capitalize on Record-Breaking Private Equity Activity?

May 25, 2018 By Dr John Binkley - Generational Equity

When determining your exit strategy or looking to attract investment into your company, it is important to remain open-minded with regards to who classifies as an “optimal buyer.”

Something Dr. John Binkley has identified among business owners in his time with Generational Equity and in the wider M&A market is the presumption that their eventual buyer will be someone from within their own industry (and likely a competitor), and it will be a straightforward 100% sale.

For some, this will be how their exit process pans out. But, there are alternatives. This piece is focusing on one of those options that can prove to be a win-win for all parties involved in a transaction – investment from a private equity firm.

Why highlight this now? Well, as Dr. Binkley has previously emphasized, we are in the middle of one of the strongest seller’s markets in recent history. But, beyond this, many are projecting that private equity activity in 2018, particularly in the middle market, may set new records after an already stellar 2017.

In this article, Dr. Binkley will outline what a private equity firm is and how a partnership with one can benefit business owners, explore the recent growth in private equity activity, and explain what business owners considering a partial or full exit of their business can do to market to these firms.

What is a Private Equity Firm & how do they operate?

“Private equity is capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.” – Investopedia

In practice, a private equity firm seeks to enhance the value of a ‘platform company’ (or portfolio company), which they will then exit at a later date for a greater valuation. In order to do this, they will often earmark smaller add-on companies to support the growth of their larger investment.

These smaller companies are usually strong synergistic fits for the platform company, giving it access to improved technology, additional capital, access to new markets and more skilled staff, among other benefits.

This continued investment into the platform company will often be carried out over a number of years in pursuit of an optimal return, both for the private equity firm and the original owners of the business, who often stay on during this process due to their expertise and understanding of the company’s culture and industry.

In Dr. John Binkley’s experiences as part of Generational Equity, these private equity firm transactions are most often established through a partial sale. In these scenarios, the equity firm acquires 51% or more of the target company, existing management is retained, and the firm continues to invest into the growth of the company over time.

What are the benefits of working with a Private Equity Firm?

As a result, partnering with a private equity firm through a partial sale presents significant benefits for business owners who have reached their ceiling in terms of building their company’s value, or aren’t looking for a complete exit from their business. With investment from a private equity firm, a company might experience:

Greater investment of capital into areas of their company
Expansion of their operations
Increased brand awareness in new or existing markets
Implementation of more efficient processes
Introduction of new staff/management
Institution of improved technology and equipment
Enhanced marketing and sales acumen

An example of this in action can be seen in the sale of Tate’s Bake Shop to Mondelez International for $500 million. Tate’s Bake Shop was previously a portfolio company of Riverside Company, a private equity firm specializing in the lower middle market.

Thanks to the guidance, support and funding provided by Riverside, Tate’s was able to grow beyond its pre-existing means at an exceptional rate to achieve this valuation upon their sale. For the owners of the company, this meant they were able to pursue further growth with the help of like-minded individuals and receive a return on investment upon their exit they would likely not have achieved otherwise.

Is now an ideal time to consider Private Equity Investment?

Having a firm grasp on what private equity firms do and the benefits it can have for your business, whether you’re planning on selling the business or investing in its future growth, is invaluable in the current market.

As Dr. Binkley mentioned earlier, we could be on the road to a record-breaking year for private equity activity. According to PitchBook’s recent US Middle Market PE Report, $54 billion was invested in middle market private equity activity in Q1 2018, continuing the pattern set in 2017’s record-setting year for both acquisition value and volume of transactions completed.

Almost $55 billion worth of capital was realized in 2017 upon exit, a 55% increase on the previous year and only slightly short of the 2015 peak. However, it should be noted that 2017 represented a consistently strong seller’s market that was not skewed by one great quarter or a couple of standout transactions – both Q2 and Q4 were worth over $15 billion.

In addition, add-ons now represent more than half of all buyout activity, a much higher percentage than even a few years ago, while nearly 30% of companies backed by a private equity firm undertake at least one add-on acquisition per year. Furthermore, with the baby boomer retirement wave expected over the next decade (10,000 baby boomer business owners already retire every day), now is considered an ideal time to pursue investment before the market becomes crowded.

Why the interest in lower middle market companies? The numbers don’t lie – there are 350,000 companies with an annual revenue between $5 million and $100 million, compared to just 25,000 between $100 million and $500 million. So, with private equity firms sitting on a record amount of dry powder ready to be invested, they will look to the largest volume of companies to devote their time and money to, which also have lower risk associated with them.

It is easier for private equity firms to score runs with several one- or two-base hits than it is to score with a single swing that has the intention of hitting a home run.

How can I take advantage of increased Private Equity Activity?

With demand high for middle market businesses among private equity firms, the best advice Dr. John Binkley can offer is don’t delay in marketing your company to these groups. As previously mentioned, the market is set to become crowded over the next decade due to the retirement of baby boomer business owners, while at present private equity firms are urgently searching for new investment opportunities.

Whether your business is chosen as a potential platform company for a private equity firm, or identified as an effective add-on for a pre-existing portfolio company, there are plentiful opportunities to achieve an optimal value. With effective collaboration and investment, all sides stand to benefit and generate more revenue in the long-term.

It is encouraged to reach out to an M&A advisory firm like Generational Equity for further guidance, and to ensure you locate private equity firms that align with your own business goals. Realizing the potential private equity investment can have on your business is often predicated on a strong partnership and shared culture between all parties. So, getting professional support in assessing your options is essential in making the most out of a relationship with equity firms.

If you’d like to learn more about private equity and how it could play a key role in both the future growth of your business and eventual exit strategy, you should browse Generational Equity’s in-depth M&A insights. Their website contains numerous valuable resources on the topics of private equity, add-on acquisitions and exiting for the optimal value.

For more from Dr. John Binkley, be sure to visit his blog for further exit planning advice, management tips and recent updates from his activities.

The Importance of Business Documentation

April 16, 2018 By Dr John Binkley - Generational Equity

If it’s not in writing, it doesn’t exist.

These words stand true in most aspects of life in the eyes of Dr. John Binkley. When you fail to note your ideas, beliefs, processes and more on paper, they are lost to the world in your absence.

Indeed, Dr. Binkley’s commitment to this saying was a driving factor behind writing his book, Character is King. He urges everyone reading this to write their own book or keep a journal, so your unique experiences and thoughts are kept alive, whether they are left just for your loved ones or preserved for the world to discover.

However, the importance of documentation increases exponentially for business owners, particularly when you are preparing to exit. If you want to achieve the optimal value for your company, keeping up-to-date documentation of its most important aspects will present an accurate reflection of your company’s worth, highlight instances where its value can be enhanced, and ensure your business is “buyer ready.”

In this blog post, Dr. Binkley expands on how documentation plays a fundamental role in your business sale, provides three key examples of M&A documentation, and the explains the significance of other documents that outline your business processes.

Documentation that makes your business “buyer ready”

It is important to establish immediately what documentation is essential to becoming “buyer ready.” No matter what, it is critical that you start documenting this data as early as possible, so you are in a position to exit your company when the timing is right, and not due to circumstances beyond your control.

Before you even present any information to a prospective buyer, this documentation plays a key role in an M&A advisor determining the true value of your business. Unless you have a background in finances, it is unlikely your immediate assessment of your company’s worth will reflect its true value. For Dr. John Binkley and the team at Generational Equity, this is the first step towards an optimal exit strategy.

Without a comprehensive collection of your finances, equipment, facilities, and other valuable data, it is impossible to provide an accurate reflection of your company’s value. This means you could risk leaving money on the table at exit, or you could have unrealistic value expectations and expect a higher value than the market will bear.

So, by starting to document this information early, long before you are ready to exit, it will speed up the process for an M&A advisor to determine your magic number, allowing you to enter the market as soon as possible and take advantage of favorable market conditions.

It sounds like a no-brainer, but you would be surprised at how many business owners are lacking the necessary information when they decide to exit, wasting valuable time to accrue this before it can be presented to professional buyers. Findings published in 2016 by the Association for Information and Image Management (AIIM) discovered that less than 25 percent of organizations capture data from paper directly into their business processes.

Professional buyers are going to want to see your financials, both historical and projections for the future, information about your customer and supplier base, current operations, staff details, a history of your company, etc. These will be required as standard and are essential to securing any realistic transaction with a buyer.

But, there is documentation that could prove extremely valuable in helping your business stand out against competitors. Remember – professional buyers examine hundreds upon thousands of prospective targets every year. In order to motivate them to pursue your business in a crowded field, it is highly encouraged you go beyond the minimum expectations when compiling your business documentation.

What’s an example of valuable documents that are often missed? One that springs to mind immediately is your off-balance sheet assets, also known as intangible assets. These will not be featured in your earnings and other financial records, but they have a significant bearing on your value in the eyes of certain buyers.

Ask yourself – do you have written records, statistics or proof of your company’s:

Patents, Trademarks and Copyrights;
Brand Value and Reputation;
Subscriptions and Service Contracts;
Software;
Video and Audiovisual Material;
Internet Presence?

Keeping a comprehensive catalog of your intangible assets can pay dividends when selling your business. Just because their value can’t be quantified in the same way as your earnings or equipment, you should not neglect them. Your ideal buyer will likely recognize more value in these intangible assets than others, enhancing your return on investment.

3 Essential M&A Documents

Dr. John Binkley’s experience with Generational Equity has familiarized him with the vast number of documents that are required to complete a transaction, especially when you want to ensure you are exiting for the optimal value. Here are three of the critical documents that you will certainly encounter when you engage in M&A activity.

Confidentiality Agreement

First and foremost, before transferring any key documentation to a prospective buyer, it is critical to have a Confidentiality Agreement drafted, preferably by an attorney who is familiar with the M&A process. If you reveal this information to a buyer without this being signed, you open your business up to a world of risks that can easily be prevented. This is a necessary expense to protecting your business during this process.

Offering Memorandum

Your Offering Memorandum is the comprehensive package that displays to buyers the factors that make your company a viable acquisition target. Usually ranging between 40 and 60 pages, depending on the unique conditions of your business, this will play a key role in convincing buyers to proceed with negotiations and pursue the most beneficial offer. Elements that will feature in your Offering Memorandum will likely include:

Three years of historical financials
Five years of projected financials
A full description of the company, including a complete history, its current operations, and future growth opportunities
A SWOT analysis on the business (strength, weakness, opportunities and threats)
Analysis of the projected growth of your industry
An examination of key clients and suppliers
Full disclosure of significant contractual relationships with suppliers/customers
An organizational chart with a focus on critical employees and their relationship with the company
A full list of off-balance sheet assets that make the company unique and successful

With this quantity of data, you can see why it pays dividends to start the documentation as early as possible. Furthermore, it is crucial that all information contained within your Offering Memorandum is accurate and truthful. The temptation to inflate numbers to entice a better offer might feel worthwhile in the short-term, but the due diligence performed by professional buyers will discover any discrepancies, which could significantly damage the trust between both parties.

Letter of Intent

Last, but undoubtedly not least, is the Letter of Intent (LOI). You may be unaware of this unless you have experienced an M&A transaction – it is essentially a neutral document that is designed to protect both parties during the deal, and ensures any breaks in this can be settled without one side being unfairly disadvantaged.

For instance, as the business owner, you will want to ensure time isn’t wasted compiling documents or negotiating with a buyer that isn’t committed to seeing the deal through, or is keeping an eye on other opportunities. In the same vein, a buyer may want exclusivity in negotiations and not have to enter a bidding war with another acquirer at the 11^th hour.

Through Letters of Intent, the interests of all parties are protected throughout the M&A process. The support of an experienced dealmaker in agreeing to the terms of an LOI can be invaluable in keeping deal negotiations flowing and ensure that your side of the equation is completely fair.

Diligent Business Documentation

In conclusion, Dr. Binkley hopes this article gives you an insight into how important writing and frequently updating your important business documentation can be to exiting for the optimal value. By tracking your key financial details, as well as often-missed intangible assets, you take massive strides in building a “buyer ready” company – one that is primed to enter the market when time is of the essence, rather than hurriedly preparing due to unforeseen circumstances.

Of course, the documentation mentioned above is just a taste of the documentation you should be keeping to ensure the effective operation of your business. Examples like business continuity plans and company hierarchies not only reduce the responsibility of running the business on your shoulders, as others can quickly be made aware of the required processes, but also demonstrate to buyers that your company is effectively prepared for all eventualities. This could be a valuable advantage in the pursuit of the right deal.

For more information on the kind of business documentation you should establish in your company, Generational Equity’s regularly updated insights include several articles dedicated to prominent M&A documentation and how they impact your sales value.

Alternatively, you can download their whitepaper entitled “Make Your Company Buyer Ready” to discover what documentation, among other things, helps to build your business with your preferred buyer in mind.

If you’d like to learn more about Dr. John Binkley, you can read more about his life and experience on his website.