Q: Why should I use an intermediary?
A: A knowledgeable M&A advisor can help you create the most profitable deal for your company. But be sure you pick an advisor who has a thorough knowledge of the staffing industry, a ready-made inventory of firms with which to partner and the ability to reach out to other viable candidates. Whether you’re buying or selling, an M&A expert can help you find the company that’s right for you. And your confidentiality is assured. A mergers and acquisitions advisor will comb the market for potential partners without disclosing your identity until you’re ready to begin negotiations. And M&A advisors are committed to creating partnerships that benefit both buyers and sellers.
Q: Should I wait until the market is stronger or business improves before I sell?
A: Sellers sometimes achieve higher returns after they’ve improved the business (larger, higher GPM, greater diversification of clients). But more often than not, delays translate into lost opportunities. Consolidation trends, technological innovations and a myriad of factors can change quickly, dramatically affecting mergers and acquisitions opportunities and the value of your company. Waiting until things get better could help, but why risk it?
Q: Is there a difference in what buyers are willing to pay?
A: The value of a potential target can vary depending on the buyer and the synergies created by the acquisition. Buyers use different formulas for pricing a target and evaluate targets based on a variety of performance indicators. The most commonly used indicators are a percentage of the seller’s gross revenue or GPM, or a multiple of its net earnings.
Q: If I’m thinking of buying a company, how should I evaluate a target for possible acquisition?
A: Begin by identifying and quantifying the benefits of the acquisition. Prepare a model that recasts the potential revenue, adjusting expense levels under your management and estimating the resulting income or cash flow. Discount future returns by your company’s cost of capital to determine the value of the company you’re thinking of acquiring. Armed with this estimate of value, you can now begin negotiating the terms of a deal.
Q: How will I know if the price is right?
A: First, you need to understand the difference between a good investment and a good company. A good company, with its many strengths, may prove to be a bad investment if you pay too high a price. But even a company with weaknesses may be a good investment if the price is low enough and the buyer can compensate for those weaknesses.
Q: What entices companies to the deal-making arena?
A: Motivations help explain why deals happen. As either a buyer or seller, you must be clear about your motivations and those of the other party who is considering a transaction.
Common motivators for sellers:
• Personal desire to sell, and issues such as health and age
• Lack of successor
• Need for additional capital to finance growth
• Growing financial difficulties, declining performance
• Disadvantages that cannot be overcome as a stand-alone business
• Tempting valuation for mergers and acquisitions
Common motivators for buyers:
• Expand product lines or geographic markets
• Improve profit and cash flow through revenue enhancement or cost reduction
• Enhance competitive strengths or reduce weaknesses
• Acquire needed technology or capacity
• Prevent competition from entering the market
• Better employment of surplus capital or management
• Diversify to minimize risk
Q: Why do some deals fail? (AKA buyer beware!)
A: Deals fail for many reasons. They include the following:
• The price a buyer pays is too high
• Failure to appreciate customer reaction
• Exaggerated synergies
• Failure to integrate operations quickly
• Inconsistent strategy
• Inadequate due diligence
• Failure to estimate and recognize stand-alone fair market value
• Incompatibility of corporate cultures
• Failure to consider first-year negative synergies
• Distraction from existing business
• Inadequate risk analysis
Q: Should I consider buying a “challenged” company?
A: Don’t always reject companies that display weakness. Companies frequently come on the market because they have strategic disadvantages ranging from lack of capital to inadequate distribution. These limitations often reduce a company’s growth and returns and, in the process, its value. This may actually make it a more attractive acquisition, particularly when the buyer has the ability to eliminate these problems.
Q: How can I prepare to sell?
A: Selling your company is not like selling your home. It’s a far more complex process—financially, operationally and emotionally. As a result, much more preparation is needed to successfully complete the sale. Advanced planning, often over a period of years, may be necessary to capitalize on your company’s strengths and minimize its weaknesses.
Here are some of the steps you should take as you prepare to sell your company:
• Understand your motives for selling and what you want to achieve
• Build your company’s value
• Pay attention to market factors and how they could impact your sale
• Make sure all your advisors are on board—legal, accounting, M&A broker, etc.
• Understand performance indicators (gross revenue, GPM, net income) that measure what your business has achieved
• Conduct a preliminary valuation of your company
• Prepare an offering memorandum
• Identify qualified buyers or use intermediaries to narrow the field
• Have all your financials ready for distribution before moving ahead
Q: What unexpected events do I need to be prepared for?
A: Be particularly prepared for extensive negotiations, adjustments to your expectations, accommodating the buyer during due diligence and doing your own due diligence on the buyer.