M&A

COVID-19 & Focusing on the Future for Middle Market M&A

April 17, 2020 By John Binkley

In a matter of weeks, COVID-19 has changed the world as we know it in unprecedented ways. From restrictions on travel and mobility, to employees globally working remotely to bypass the pandemic, life feels like it has been flipped upside-down.

The M&A industry has not been immune to this impact. COVID-19 has been at the heart of current economic uncertainty, and subsequently this has caused deal making activity to slow in the short-term. Fortunately, at Generational Group we have continued to safely press ahead with transactions even at this tumultuous time.

As a recent roundtable meeting hosted by Axial highlighted, many deals at the Letter of Intent (LOI) stage are either pushing forward with urgency, or left on ice for the time being. While right now it is impossible to predict how long these existing conditions will remain, I am optimistic that it is a challenge we as an industry will overcome, and return to a state of ‘business as usual’ in due course.

Here, I explore my reasons for staying positive in the face of this crisis, and why I expect the M&A landscape to return to its once-thriving state when we can put these circumstances behind us.

Our economic foundations remain strong

Firstly, while COVID-19 has unfortunately resulted in numerous businesses shuttering short-term and a steep rise in unemployment, the underlying fundamentals of our economy remain strong in the face of this extraordinary challenge.

This is different from the banking/financial crisis we endured in 2008. Corporate balance sheets remain strong, interest rates are staying low and there is capital available to support business growth and acquisitions. But perhaps most importantly of all, our banking system is stable and its reserves are well above Federal guidelines.

As a result, we can be confident that our economy will hold firm against this temporary pressure, and will over time return to a positive landscape for M&A acquisitions.

In addition, the launch of the $2 trillion CARES Act stimulus package has bolstered the prospects for businesses looking to retain and take care of their employees. By providing quick funds and relief for SMEs during this time of uncertainty, this will be critical in keeping companies operational and supporting their preparations for the recovery period.

Private equity is still sitting on a mountain of dry powder

As noted, there is undoubted turbulence in the M&A market right now, and this should be expected for a little while. However, we are still seeing substantial buyer interest in spite of these challenges, which is reinforced by the capital available to these groups.

Private equity firms are a prime example of a buyer group prepared for when the market stabilizes. As Bloomberg reports, they are sitting on a $2 trillion war-chest of dry powder, all of which can exclusively be devoted to M&A acquisitions and investments. This puts them in a strong position to actively pursue opportunities as we start to recover.

Furthermore, Bloomberg’s article also notes how companies in a variety of industries will likely prove extremely attractive prospects for business buyers on the other side of the COVID-19 crisis, due to these being largely unaffected from an economic growth standpoint.

Buyers are bullish about future acquisitions

Meanwhile, Pitchbook revealed that a recent survey conducted by Ernst & Young suggested that around 56% of executives actively plan to pursue acquisitions in the next 12 months, which, remarkably, is an increase from October’s figure of 52%.

This is excellent news for business owners considering their exit plans in this uncertain state of affairs, as this demonstrates that when the world starts returning to normal, we can expect a major uptick in deal activity. Companies who have managed these circumstances and dedicated time to planning their exit strategy stand to benefit the most from this.

Plus, this is especially true for lower middle market businesses, because as Pitchbook states:

“For now, many dealmakers are forgoing transformational mega-deals in favor of smaller, discounted acquisitions.”

While the short-term vision for M&A remains a difficult prospect as buyers and sellers seek out firmer footing, these findings fill me with confidence that there will be a flurry of activity and opportunities when there is greater clarity about this entire situation.

Use this time to perfect your exit strategy

Hopefully, this has helped you join me in believing that COVID-19 will present short-term challenges for M&A activity, but will not completely compromise the optimism both buyers and sellers entered 2020 with.

While I recognize this can be difficult to visualize considering the present environment, there are reasons to be upbeat about the future of the industry – and with it, your prospects of achieving an optimal exit.

Right now, my advice to business owners is to dedicate time to exit planning, especially if this is something you’ve not commenced with already. This anticipated slowdown of deal activity in the short-term gives you the opportunity to consider your next steps and build a buyer-ready business to coincide with when the world starts its recovery.

Remember, it will take 90-120 days to complete the critical first step in your exit journey – an initial business evaluation. Starting early with your exit strategy puts you in a strong position to effectively market to buyers preparing for normalcy to resume, and will help you secure an offer that accurately reflects the value of your company.

Our team at Generational Group can support you throughout this journey, even during these challenging times. Our associates continue to operate at their typically high standards, working remotely to ensure their safety while we continue to communicate with clients digitally. These include virtual versions of our informative exit planning meetings, where our experienced advisors break down the steps to maximizing the sale of a company.

I’d urge anyone to get in touch with our team to get a head start on their exit plans while activity is on a temporary slowdown – I’ve never met someone who regretted beginning this process earlier than they needed to.
Also, for more up-to-date information on how COVID-19 is affecting the M&A landscape – and what this means for prospective sellers – make sure you’re subscribed to Generational’s insights. With news fluctuating all the time on this topic, staying informed has never been more crucial.

Managing the Difficulties of Due Diligence in M&A

February 10, 2020 By John Binkley

There’s no doubting that 2019 was a strong year for M&A activity.

Our team at Generational Group benefited from the strength of the current seller’s market, once again ranking #1 for deals closed worth up to $25 million, and #2 for deals up to $100 million. And more insights into this active year have been spotlighted in Deloitte’s U.S. M&A Trends 2020 report.

Taking insight from 1,000 executives across the U.S., Deloitte’s report presented several important points about the current M&A landscape and what we can expect moving forward, including:

63% of respondents believe transaction activity will rise in 2020
Dealmakers are shifting their attention primarily to the domestic market due to concerns over trade instability
Corporations and private equity firms have access to record-setting capital reserves
Focus is changing from large (mega) deals and is more interested in deals within the middle market

All of these factors should give business owners contemplating their exit plans confidence that they can secure an optimal offer for their company in 2020. At the same time, it reminds us that this market won’t last forever, so it pays dividends to start planning while the market is still in favor of sellers.

Due Diligence Delays?

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But, the area of Deloitte’s report I’d like to focus on in this article is the insight they offered into due diligence. Their findings revealed that 47% of executives believe the due diligence process is now longer compared to five years ago.

According to Deloitte:

“Gartner says the average time to close an M&A deal has risen more than 30 percent in the past decade.” This development may be related to the greater complexity of deals, or it may be rooted in where we are, well into a long M&A cycle, which makes it harder to find good deals. Regulatory and policy uncertainties, along with information security concerns, may also play roles in extending the due diligence phase.

If you’ve never been through M&A due diligence before, in some ways I envy you. This is the 2-3 month period where prospective buyers meticulously assess a company that they’re interested in, to reassure them that:

The information the seller presented to them in their Offering Memorandum was correct; and
There is no great risk involved in acquiring/investing into the company in question.

Risk is a word buyers want to avoid in all circumstances. Due diligence is there to uncover and evaluate any areas where this is present. And, naturally, this means this is the period of the exit journey where negotiations are most likely to collapse for a variety of reasons.

The seller may become fatigued about the unceasing questions and discussions with the potential buyers. Or a buyer could find inconsistencies in their findings from the documentation they were provided by the seller, leading to a break down in trust.

In Deloitte’s report, they have highlighted that the increased complexity of deals and trying to juggle multiple buyers at once have caused the speed of this process to falter in recent years. But why exactly is due diligence such a marathon to contend with?

The Due Diligence Checklist

When discussing due diligence, I’m always reminded of a long-established turn of phrase:

A deal isn’t really a deal until it falls apart at least twice!

At Generational Equity, navigating the potentially treacherous waters of due diligence is something we’ve become adept to over the years. While no two M&A transactions are alike, this experience is invaluable to anticipating what issues a prospective buyer may have and how to respond to these to keep a deal on track.

Still, without a clear understanding of where the typical 200-300 due diligence questions will come from, exiting business owners can easily find themselves at loggerheads with buyers.

Areas that will be interrogated during due diligence include:

General Company Information – what is your company all about?
Financial Matters – how healthy is your business financially?
Products & Services – what is your company’s offering?
Property – what property does your organization own or lease?
Customers & Revenue Streams – how diverse and wide is your customer base?
Technology & Intellectual Property – what tangible and intangible assets do you have rights to?
Strategic & Cultural Fits – are your strategies in line with the buyer?
Employee Information – what are the skills and overall quality of your existing team?
Material Contracts – what contracts and other commitments do your company hold?
Tax Matters – is your company at risk of litigation or liabilities related to tax?
Insurance Coverage – how protected is your company through its insurance?
Antitrust & Regulatory Issues – has your company been under investigation for any antitrust problems in the past?
Cybersecurity – does your business have robust IT defenses and support?
Environmental Factors – is your company’s impact on the environment positive or negative?

This is just an overview of what you can anticipate from due diligence, which makes it no wonder that this already exhaustive process has gotten longer and longer over the years. So, when you want to ensure your exit is as smooth and streamlined as possible, what steps can you take to minimize the time it takes to complete this task?

Ways to Streamline the Due Diligence Process

Don’t mislead buyers in your documentation

First and foremost, be honest and accurate in the documentation you present your potential buyers.

While it is encouraged to recast your financials to provide a true reflection of your potential to buyers, flat out lying or subverting details is a real deal-breaker – buyers will find the discrepancies and call you out. This may lead to a loss in trust, resulting in a reduced offer from the buyer, or negotiations coming to a halt altogether.

Stay organized with documents and checklists

Collating and updating your core information in your Offering Memorandum is a painstaking process, but it saves a lot of time and headaches during due diligence.

If information is incomplete or missing, buyers won’t simply shrug and move on – they’ll do what they must to get a clear picture of your company. So starting early in collecting this data will likely reduce the time a buyer takes to understand your proposition.

Be prepared to answer and address risks

No matter how thoroughly and organized you have been in the build-up to this part of the exit process, due diligence will raise questions that you will need to answer about your company.

Preparation is everything at this stage of exiting a company – undergo internal checks to get a clearer idea of what queries your company might inspire, and identify any areas of risk so they can be addressed and remedied before potential buyers bring them to the table.

Work with a professional M&A firm

Finally and arguably most importantly, don’t go into the due diligence process alone. Our team at Generational Equity have estimated it can take at least 1,000 hours of your time to go from marketing your company to closing a transaction – much of it spent in due diligence.

Working with an M&A firm will mean you’re backed by people experienced in navigating this process, so you avoid any pitfalls, are kept focused during testing periods, and ensure any areas of risk are dealt with prior to buyers conducting their checks. It’s a tough road, but it’s easier to walk with someone alongside you.

In addition, the first phase in the Generational process is a thorough and complete evaluation of your business – a “mini” due diligence. This step is critical because we ferret out many issues that need to be addressed long before due diligence is started. This is one reason why we are one of the leading middle market M&A firms; buyers have confidence that when we bring them deals that we have done our own due diligence.

Approach Due Diligence with Confidence

As the due diligence process becomes more in-depth and comprehensive, knowing what to expect and having an experienced team by your side is crucial to making this difficult portion of the exit process as efficient and well-managed as possible.

Hopefully this has provided a deeper understanding so you can approach your exit with more assurance. If you’d like to learn more about what’s involved in due diligence, there are numerous articles on this topic in Generational Equity’s regularly updated insights.

The Advantages of the Add-On Acquisition Strategy

November 1, 2019 By John Binkley

In September 2019, Presidium Network Services, a client of our team at Generational Equity, was acquired by Baymark Partners. A successful transaction in the active business services sector – is there anything missing here?

Well, what makes this deal stand out is it being an example of an add-on acquisition. The goal of Baymark in purchasing Presidium was to support the development of their existing platform company, Slappey Communications.

Baymark identified the compatibility between both their platform and this new acquisition, and believed these similarities alongside the skills, services and location of Presidium would effectively accelerate the growth of Slappey, and subsequently secure them a greater return on investment.

This is just a first-hand example of where I’ve encountered add-on acquisitions, a topic I’ve covered on this blog in the past. However, since then, this M&A strategy has become even more prevalent among private equity firms worldwide. And, therefore, they represent a very viable option for business owners looking to exit for an optimal offer.

In this piece, I want to outline the purpose of add-on acquisitions and the ‘buy and build strategy’, assesses the popularity of these transactions, and offers some advice for sellers before pursuing this path.

Add-On Acquisitions and Buy-and-Build – An Overview

Divestopedia defines an add-on acquisition as a company added by a private equity firm to one of its established platform companies.

It is a technique many PE firms apply in order to spur the development of a company that they have interest in growing and increasing the value of, with a typical end-goal of selling it for a greater return on their investment or taking it public. The value of the add-on or ‘bolt-on’ company almost comes secondary to how it synergizes with the platform company.

Simply put, if a PE firm sees potential in a target to benefit a platform they’ve invested into, they’re more likely now to pursue the opportunity. And that can be incredibly lucrative to middle market business owners.

Take the approach of Audax Private Equity: In their 20-year history, they’ve invested over $5 billion into 126 platform companies and 774 add-ons. That breaks down to an astonishing 39 add-on acquisitions per year! This demonstrates that for many working in M&A, this is THE approach for them.

This technique is also often referred to as a ‘buy-and-build strategy’. As opposed to the financial engineering strategies I saw widely employed in the 1980s and 90s, this approach is designed to improve the operations of platform companies, while simultaneously growing the separate business units strategically.

As Bain & Company’s annual Global Private Equity Report illustrates:

“Buy-and-build can offer a clear path to value at a time when deal multiples are at record levels and GPs are under heavy pressure to find strategies that don’t rely on traditional tailwinds like falling interest rates and stable GDP growth.”

And this isn’t just gradually bolting on one or two companies to a platform over the course of several years – Bain defines buy-and-build as “building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies.”

The prevalence of the buy-and-build strategy offers an effective avenue for PE firms to accelerate the development of their platforms, and potentially make companies in the middle market much more attractive propositions.

So, why are they not more widely considered by those looking to exit their company?

In my experience, I’ve noted a lack of awareness among clients about this type of buyer. This isn’t surprising, as they tend to fly under the radar to deflect any publicity – you often don’t see these transactions front-and-center on the Wall Street Journal!

But, for owners of middle market businesses, this is now a solid path to achieving an optimal offer, provided you are working with experienced M&A professionals. Especially now, with add-on acquisitions arguably more prevalent than ever before.

The Rise in Add-On Acquisitions

In their 3Q 2019 US PE Breakdown Report, Pitchbook identified that add-on acquisitions now constitute 68% of all PE buyouts. So far in 2019, the number of reported add-ons is in excess of 1,700, with Pitchbook anticipating that this year will see a record number of these transactions completed.

Through my personal insight and Pitchbook’s findings, there appear to be three key factors in this growing predominance:

The amount of dry powder available to PE firms
Heightened focus on the buy-and-build model
The rising buyout multiples

Firstly, the level of dry powder accessible to private equity firms is at its highest since the lead-in to the global financial crisis, sitting at around $2.5 trillion. This capital can only be used to invest in companies and, with this extraordinary seller’s market still holding strong, there is a race to invest while the timing is right.

On top of this, as I’ve alluded to earlier, the buy-and-build strategy is being employed more and more often to help a platform company reach the next level. The more this is turned to, the better investors are becoming at spotting opportunities and applying it effectively.

Finally, US PE buyout multiples are at a very high level. This potential to develop an investment and make substantial returns is high right now, and may continue that way for the foreseeable future. And while that remains the case, add-on acquisitions will remain an attractive proposition, both to buyers and, as I will now discuss, sellers.

Why Sellers Should Consider Add-On Buyers

Now it’s been established what add-on acquisitions are and how prevalent they have become among prospective buyers, why do they present such a viable option for those considering their exit plans?

As I’ve covered throughout this piece so far, the advantage of an add-on acquisition strategy is it places smaller middle market companies in the crosshairs of significant investors looking to grow a platform.

Whether this is achieved by harnessing the add-ons skilled workforce, introducing new products and services, or expanding into previously unexplored markets, add-ons represent a strategic answer to the question “how can we grow X company?”

PE firms will devote a lot of time and resources to finding targets that fit what they’re looking for. And, consequently, they will be more willing to pay a premium for those in that bracket.

This should be encouraging middle market business owners contemplating their exit plans to throw their net further in a bid to find the right buyer. Reaching these firms looking for companies that synergize with their platform could prove a lucrative investment, as firms hope to make the turnaround on their initial investment as profitable as possible.

Furthermore, the art of the add-on acquisition for sellers is that in many cases, the PE firm will retain the management team under a newly capitalized format. So not only does that allow you as a business owner an opportunity to continue to build your legacy into your business with access to new resources and strategic support – it allows you to participate in a second bite of the apple when the larger entity is sold or taken public.

Sounds more intriguing now, doesn’t it? Fundamentally, your success in securing an optimal offer from a PE firm interested in add-on acquisitions will depend on two key factors:

How well your company aligns with the platform entity; and
How effectively you can locate and market to these buyers.

The first of these will very much depend on the buyer and what their objectives are. The second is the real challenge – as mentioned earlier, these buyers work under wraps and do not often publicize their dealings.

Therefore, it’s essential to work with an experienced, well-connected M&A advisory firm who can help put you in front of the firms that are searching for a company with your qualities, like Generational Equity. They will understand how to negotiate with these groups and highlight the intangible assets your company possesses that will encourage them to pay a premium for your company.

In Summary

To conclude, if you take anything away from this article, it’s to consider all available buyers when acting on your exit plans. The growth of add-on acquisitions is just one of numerous factors in how you can pursue an exit for maximum value.

But, without the expertise, connections and support of a highly-skilled M&A firm, you are likely to miss out on the potential these buyers offer your business, which could mean you leave money on the table when your exit is finalized.

If you’d like to learn more about add-on acquisitions and the value they can offer to your exit plans, Generational Equity’s insights provide useful knowledge and guidance across the entire M&A process.

Alternatively, if you would like to read more from me, check out my blog for further articles on M&A, business, personal development and more.