Preparing for M&A – Heather Dawson interviews Grant Kirby for Business Essentials – 14 October 2015

by | Oct 21, 2015 | Selling a Business

  1. How much M&A activity is there at the moment?
    • There is a reasonable amount overall, but it is patchy. Some sectors like health, food, agriculture and financial services are doing reasonably well and it is business as usual, but other sectors are in a downturn and are focusing on survival or cutting costs.
  1. What are the biggest reasons these days for considering a merger or acquisition?
    • M&A in sectors doing OK will be driven by largely growth aspirations, whereas M&A in the sectors not doing so well are mostly driven by the need for consolidation to reduce costs and price competition.
  1. Could it also be a good strategy for mature business owners looking at succession?
    • Yes, and that is where M&A is particularly interesting at present. The GFC hit in 2008 just as a big wave of baby boomer business owners reached retirement age (say those born between 1946 and 1953 who were 55 to 62).
    • The GFC made it difficult for many to sell out at anything like their desired price, so many owners held on. Seven years on and conditions have not been easy in certain sectors, especially those that did not really benefit either directly or indirectly from the mining boom. Some of those owners have been waiting a while and are now way past their preferred retirement age.
    • Meanwhile, another wave of baby boomers is also approaching retirement age and will want to sell.
    • The big question is how to achieve a reasonable price in the difficult conditions that prevail, for many of the traditional services and manufacturing businesses where the baby boomers are concentrated.
    • In response, we have adapted our service offering to include preparing businesses for sale. We now work with a business for two or three years to help prepare the business for sale. We start with the end in mind and create a picture of what the business needs to look like in order to optimise the exit price for the owners and we work back from there.
    • That is a major focus of our business, because it is just not that easy to wake up one day and decide you want to sell and get the optimal price for your business.
    • Ideally you need to position your business to add value for a buyer and make it as attractive as possible. It sounds easy but it requires some careful planning and good execution.
  1. “Mergers and acquisitions” tend to be clumped together as one business activity but are there significant differences between the two?
    • A true merger occurs where the owners of one company swap their shares for shares in the acquiring company, so that the operations are integrated and the ownership interests are merged. That only happens on scrip for scrip mergers.
    • Most M&A deals are either straight acquisitions or a hybrid.
    • The main reason for this is that when two competitors merge there is only one management team needed and so one needs to walk with cash. It is the difficulty of managing differences of opinions between strong-minded people that makes true mergers difficult.
    • Also, M&A transactions are difficult to achieve and difficult to extract value from after the deal and so a simple deal is usually a good deal. Complexity adds to the risk of not completing the deal and the risk of poor performance after the deal.
  1. If you haven’t yet met the perfect business to join up with, how do you find it?
    • There are two main approaches to finding buyers and selling a business. The first is similar to selling a house and is used by business brokers. They produce a flyer and broadcast the opportunity far and wide to sometimes thousands of potential buyers via mass email-outs and websites. This approach is good when you want to tap buyers who are cashed up looking for any sort of a business to buy, and it suits the very small businesses. I call this this the “machine gun” approach.
    • The second way is to approach those buyers who can add value by creating synergies through a merger of your business with theirs. This is the targeted or “sniper approach”. It is a better way of maintaining the confidentiality of the sale and the information and it can potentially obtain a higher price because you are creating value through the synergies of integrating the operations. This is the approach that we at Cambian use and it is the approach used for selling most businesses worth more than a couple of million.
  1. We often hear about the dangers in partnerships. Is one sort of structure better than others when you’re looking at merging with or acquiring another business?
    • Let me say that most M&A transactions do not lead to partnerships. As I mentioned above, usually the deal is for an outright acquisition. The vendor shareholders may stay in if they are either:
      • seen as critical to the management of the business going forward or
      • seeking to realise some of the upside from the merger or
      • they are selling into a roll-up of many businesses that is intended to be listed on the stock exchange once it reaches a critical size.
    • Partnerships are prone to disputes and at least one party being disadvantaged, and most business owners know this from experience. Hence, the majority of vendors will simply wish to sell out for cash or not sell at all.
    • Transactions that result in the formation of a partnership, are also very complex to bring about because they require negotiation of a shareholders’ agreement on how the business will be run under joint ownership, and that can be a difficult process to undertake successfully. The exception to this rule is where a private equity firm is buying in and aligning with a vendor who has similar objectives to the PE firm; i.e. grow the business and sell out within 3 to 5 years. If the two parties are aligned in these objectives then a deal may be relatively easy to negotiate.
  1. Cultural fit is obviously very important. Are there signs to watch out for that you may not be ideally matched – before the deals done?
    • I think the complementarity of the cultures of the two businesses is one of the key determinants of how much value is created from the merger. However, cultural fit is also one of the most intangible things to assess because it is subjective. I worked in PwC, the Big 4 accounting firm, for 5 years soon after the merger of Pricewaterhouse and Coopers & Lybrand and it took years for the two cultures to fully integrate. A huge amount of work was done to merge the cultures of the two firms into one, but it was not always as successful as the firm’s leaders would have hoped for.
    • The cultural fit is of most concern to the buyer, but it will affect the vendor to the extent that it prevents the sale going through.
  1. What steps should you take to prepare your business for a merger or acquisition?
    • Half of our business is dedicated to preparing businesses for sale, which is an indicator of how important we see this process.
    • Preparation can significantly improve the sale price as well as increasing the probability of it completing.
    • A sale transaction is a bit like a grand final at the end of the season. You work hard through the season, but you work extra hard in preparation for the grand final because to get the best result you need everything to go as smoothly to possible. Just as a team would never go into a grand final without serious preparation, it is not advisable to go into a sale without the same level of focus.
    • This is why we prefer to start working with our clients a few years ahead of their planned sale so we can coach the owners through the process leading up to the big event.
    • I am happy to discuss the process in detail with any of your listeners if they would like to contact us.
  1. And where are the biggest traps that will cause the deal to fall over?
    • Deals fall over for a whole host of reasons, but some of the most common are:
      1. The vendor being uncertain about whether they really want to sell and then changing their mind when negotiations get tougher than they expected.
      2. The buyer finding something they don’t like during the due diligence.
      3. Failure to agree on price, which is often caused by the vendor and the buyer forming different views on the future prospects for the business.
    • Sometimes I have seen vendors withdraw from a sale and then get a better price later, but often the deal in the hand is the best deal and vendors often regret not selling out when they could, even for a lower price than they had dreamed of.

10.  Any final words of advice for anyone thinking about embarking on either a merger or acquisition?

  • Think of it like your grand final and approach it in the same way.
  • The sale of a business is all about the buyers learning to trust the business and the opportunity to invest in it, so the investment in preparing the business and running the sale in a very methodical and strategic way will optimise your chances of getting a good price and completing a sale.
  • The hidden downside in sale transactions is not the price being lower than hoped for but the risk of “deal breakers” causing the process to fall over.
  • The skill in managing transactions is as much about managing the transaction to keep it on the rails as it is about price.

11.  From your experience, when a client first consults with you about the next step for their business, is it generally easy to tell if a merger or acquisition would be successful – or not?”

  • Yes, there are usually buyers for good businesses at reasonable prices, and so if both these conditions apply then we can usually be confident of achieving a sale. However if, for example, the vendors are heavily in debt and need a high price to pay down the debt or if the business is not doing well and there is uncertainty over its outlook, then we would usually recommend some sort of remedial action before embarking on a sale process.
  • That could involve improving the business, or if that is not possible, adjusting the price expectations.