What Buyers and Sellers Should Know About Mergers and Acquisitions
Mergers and acquisitions (M&A) can be complex—and there’s a lot to account for on both the buyer and seller side. Think about it this way: A coach usually has a game plan in place before the first play. Similarly, a company wouldn’t strike a deal without careful consideration of the current business landscape and other influential factors.
In order to better understand everything that goes into a deal and what someone can expect during the process, Print+Promo checked in with two M&A experts: Casey Campbell, president of PathQuest Group Inc., Fayetteville, Ga.; and R. Scott Sutton, vice president of Safeguard Business Systems Inc., Dallas. Here, they answer four commonly asked questions.
What’s currently going on with M&As?
Campbell, an industry veteran with over 35 years of experience, launched PathQuest in 2008, but it wasn’t until 2016 that the business began focusing entirely on M&As. The private consulting and intermediary firm closes five transactions a year, on average, primarily between distributors who sell print and promotional products—two industries that Campbell feels blend well together. He doesn’t see that number declining in the near future, and if the amount of calls, leads and referrals he receives are any indication of M&A health, activity should occur at a steady pace.
“The distribution side of print and promo continues to be very fragmented,” Campbell said of changes he’s observed over the last five years. “I am seeing more active buyers in the market in 2018 and 2019, which is good for any distributors looking to sell. Our value is in putting the right buyer in touch with the right seller. That is where experience and long-term relationships come into play.”
Safeguard, a Deluxe Company, in 2008 launched its Business Acquisitions and Mergers (BAM) strategy, which has completed just under 200 transactions that mostly focus on the lower middle-market segments. When asked what directly impacts the print and promo M&A landscape, Sutton pointed to macro and micro influencers.
“At a macro level, we know that M&A activity was robust in 2018, and even though Q1 2019 was a bit choppy, there remains a bullish sentiment that deal making will continue to be strong in 2019,” he predicted. “With favorable debt and equity markets, it’s really a seller’s market right now, given that buyers have access to capital and dry powder available for immediate investment. “At the micro level—in our space—there have been a number of acquisitions completed over the past five years, which means for acquirers like us, there are fewer firms available or interested in engaging in strategic discussions,” he explained.
What causes a company to buy or sell?
According to Campbell, age is the main factor for selling. “I know that my peers who own distributorships, because they move into their ̛60s [to] mid-'60s, if they don’t have a transition plan or succession plan already in place, it’s because they plan on transitioning the business to family members,” he said. “In this case, there is often an internal valuation and terms that are negotiated. Or, it’s a partner, or group of employees and they buy the business. But, most of the time, the type of transactions I’m dealing with—if there is no family [the business] is moving on to and there is no one inside of the business with the resources to acquire it, they need a firm like ours to position them with a suitable buyer. Age drives it.”
Sometimes, however, an executive may simply want a change in career. Campbell right now is working with the 50-year-old owner of a successful distributorship. But, he has different goals that involve traveling and spending time with family, and, from there, entering an entirely new field.
Sutton added that there are cases where the sale process has to be “massively accelerated” because of a life event, which is a strong argument for entering a business with the exit already in mind. “What I mean is, you’ve got a seller who has a health crisis, or, they have a divorce, or, they lose a major client ... and they panic, and all of a sudden, they’re trying to sell. I can tell you ... that most of the time ... in those kinds of scenarios, those sellers are not going to achieve the full value of their business because they haven’t been [planning for] it,” he said.
Part of this strategic plan, Sutton continued, needs to be geared toward the succession and exit process.
“Whether that be a year down the road, five years down the road, or 25 years down the road, that needs to be a discipline and a discussion that happens regularly,” he stressed. “So, if in the event that somebody needs to sell and get on a more accelerated pace, at least they’re covering up some of the risk that goes with not being prepared.”
That could mean sellers sit down with a qualified tax adviser to discuss the best way to structure their business, including its financials and its performance, in a way that will allow them to maximize the valuation.
“Many business owners—independent and private—operate their businesses with a view of minimizing their tax liability on a year-to-year basis,” Sutton shared. “That’s certainly not an uncommon approach and we often see varied strategies deployed by owners address the tax codes. But, those strategies don’t necessarily reflect the full value that a business may have from a profit perspective that drives valuation.”
Sutton urged sellers to come prepared with questions. For example, is a stock sale more appropriate than an asset sale? How should expenses and other items in an owner’s financials be recorded to make sure that a buyer can actually see all the value in the business?
On the flip side, buyers need to consider capital and resource bandwidth.
“Do [buyers] have the funds, the resources—from a capital perspective—to be able to execute, [but] not just from a purchase price perspective ... due diligence costs money, and integration costs money [as well],” Sutton reminded.
Buyers also should be aware of the post-close integration.
“You buy a company, [and there are a few questions you have to ask yourself, like,] how do you integrate systems? How do you get out in front of those new clients and tell the story about what’s happened and why it’s good for them and why it’s good for the organization,” Sutton said. “There are employees coming into your organization that are going to be exposed to a new benefits plan, new leaders [and] new strategies. How are you going to manage that?”
What goes into the M&A process?
While no two companies are alike, there is a process, or “playbook” as Sutton called it, behind M&As. Tweaks can occur based on the nuances of the business being targeted for purchase.
“I like to say that there is a defined process to an NBA basketball game—there are four 12-minute quarters, a 15-minute halftime and each team gets six timeouts,” Sutton said. “But, what happens in between when two teams hit the court is unique—no two games are alike, even when the same teams play in consecutive games.
“As for timing, we generally can close a transaction within 60 days of the execution of a letter of intent (LOI), which initiates the due diligence phase,” he continued. “Diligence must strike a balance between being swift and obsessively accurate. The diligence phase is disruptive—to the business of the seller and the buyer. In most cases, the time it takes for the diligence phase is directly related to the degree to which the seller is responsive to data requests.”
Campbell offered a glimpse into the process that his firm follows:
- Sellers may need several weeks to compile data that a buyer will require.
- A comprehensive “Confidential Business Overview” for the seller is built.
- Seller and potential buyer(s) enter into nondisclosure agreements.
- Introductions are made.
- “Confidential Business Overview” is distributed to potential buyer(s).
- Conference call(s) between buyer’s and seller’s ownership, and often management team, take place.
- On-site visit(s) occur.
- Valuations are agreed upon.
- Non-binding LOI is issued.
- Due diligence is conducted.
- Closing happens.
When it comes to working together, trust—between a buyer and a seller—is crucial. Without it, deals can “blow up.” Campbell recalled an instance in which a buyer continued to make changes to the purchase price to the point where the seller admitted that they “didn’t trust these people” anymore. “I think establishing a core trust is really important upfront,” he said. “Liking each other is nice, but typically once the deal is done, the buyer and seller don’t see each other.”
Sutton agreed that it’s important to have a good relationship, but cautioned companies to stay focused on the task at hand.
“There is always a big part of the process that involves planning [and] negotiation. And so, when buyers and sellers are friendly with one another—when they have a good relationship—that always helps. But, it can go too far to the other side as well,” he warned. “Buyers and sellers always need to be cautious. Even if there’s a great relationship, [and you say,] ‘I’ve known this friendly competitor for 25 years, and they’re across town, and I trust this individual,’ you still have to go through the process.”
When is the right time for a buyer or seller to tell their employees?
With so many complexities to navigate during the M&A process, it can be hard for companies to know when to clue in the staff. At the earliest, Campbell said owners should wait until the LOI has been signed. However, based on experience, he recommended holding off until the majority of the due diligence has been completed, and there are no material changes to the valuation.
“I’ve seen situations where people look at a business and go, ‘Uh-oh. Wow, I didn’t see this. Your main product line is on a 30-percentile decline. So, I can’t buy your business for that price,’” Campbell remarked. “I would say, [announce it] well into the mature stages of due diligence. If not, in some cases, it’s the day before closing. I’ve seen that happen, too. And, that’s just to avoid it getting leaked into the business or leaked into the industry.”