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Executives considering a merger shouldn’t try to time the market

At the end of 2015, a record year for mergers and acquisitions, forecasters predicted the trend would continue through 2016. Instead, commodity pressures, price transparency and a strong U.S. dollar slowed M&A activity across a range of industries.

By most measures, 2016 has still been a good year for M&A. Slow growth has caused many companies to look at acquisitions as a means to bolster the bottom line. However, it has not been perfect. According to Financier Worldwide magazine, 2016 may be remembered as much for the deals that didn’t happen as the deals that did. Increased regulatory scrutiny, diverging price expectations, lack of shareholder consensus, geopolitical turmoil and political instability crashed many deals.

Looking ahead, we can expect dealmakers to remain cautious but with an eye on growth. The reason: when the economy isn’t driving revenues, smart CEOs will seek other avenues for revenue growth. This creates opportunities for buyers and sellers alike.

Tips for sellers

Rare is the time when market conditions and business strategy align perfectly to create maximum value and return. Business is cyclical, and identifying the top or bottom of a market is nearly impossible. For sellers, this means the sound strategy is to know when to prepare for a sale, which starts with asking: “What conditions need to be present to attract buyers and investors?”

The following are three things to look for:

  •  Significant equity and debt capital available to fund acquisitions at favorable rates.
  •  Strong market conditions.
  •  Eighteen months of visibility into future market growth potential.

When these three conditions exist, seller earnings tend to be strong, and buyers tend to pay healthy multiples. However, if market conditions turn, seller earnings tend to soften and buyers tend to pay significantly lower multiples. This is why it is much better to sell six months too early than six months too late.

If you are determined to exit your business, your goal should be to “de-risk” it. That is, make your company as attractive to buyers as possible. Clean up your financials, inventory and receivables. Strengthen your core. Invest in technology. Also, focus on creating a great customer experience. Buyers will always look at specific metrics when analyzing a deal, but those that take due diligence seriously will understand that abstract factors such as customer experience affect top- and bottom-line growth.

Much of the M&A opportunity in today’s market is driven by the realization that organic growth is difficult, and because it is cheaper to buy growth than to wait for organic growth to return, buyers are supplementing organic growth with acquisition growth. So your business will be an attractive acquisition target if you can demonstrate that your company can help boost a buyer’s bottom line.

Tips for buyers
Buyers and sellers should be considering the same things. So buyers should be asking themselves: “What value can this acquisition target bring to my business?”

The financial health of the business is an obvious starting point. You will want to check the last three years of balance sheets, profit and loss statements, cash-flow statements and annual reports. If they haven’t been audited, verify the numbers. You will also want to review the three most recent years of tax returns.

Things to look for include:

  •  Revenue stream;
  •  rate of growth in relation to profit, sales and cost;
  •  cash flow or creditor issues; and
  •  up-to-date tax obligations.

You should also account for the company’s assets. Are facilities, equipment and IT infrastructure sound? How are the customers and suppliers? Checking contracts will help identify long-term business relationships and commitments that will help you forecast future performance.

It is equally important to look beyond the numbers. Company culture matters, because you are ultimately investing in people and infrastructure. So ensuring that your company and the target company have values that align can ease the transition and help drive higher performance. For example, consider customer experience. Companies that value and create a better, more progressive customer experience see better metrics, typically growing above the industry growth rate. This is especially true for companies that employ disruptive technology to create a better user experience.

Finally, know your motivation. Will the acquisition help you bring in needed talent, expand your footprint or absorb a large customer base? Understanding your motivation is where your process should start and end—especially if you are buying to supplement growth.

Looking ahead
Many analysts continue to predict a strong M&A market, as companies simultaneously focus on strengthening their core while using M&A to supplement growth. For sellers, continue to build your business and make it attractive to buyers, regardless of whether you have a one-year or five-year exit plan. For buyers, look to acquisitions that will boost your bottom line and complement existing operations. Until the market shows signs of expansion and sustainability, it’s wise to be strategically cautious. And don’t forget, timing is not as important as preparation. The ideal situation to buy or sell is unique to each business, and if you try to time the market, you may miss your ideal opportunity.

James Barger is president of KeyBank’s Rochester Market. He may be reached by phone at 585-238-4121 or email at james_r_barger@keybank.com.

11/11/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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