M&A readiness: Prepare for value achievement

Understand financials, strategy and tactics

To predict how a deal might change your financial position, you first need a deep understanding of your financial metrics. Audited yearly financials alone often aren’t precise enough to rely upon; buyers and sellers almost certainly will need their earnings, balance sheet and working capital normalized on a monthly basis to establish a baseline from which their deal can provide a springboard to greater value.

This enables the development of a deal thesis with a strategy and forecast for the benefits that a deal could bring. But the strategy may be an impossible dream unless the tactics for achievement of goals are laid out in detail. During the readiness phase, the tactics bring the strategy to life for buyers by answering questions, such as:

• Do you plan to produce an acquired product or service at an existing facility?
• Will there be back-office synergies?
• How will you meet any additional labor needs, and how much will it cost?
• How will you source the inputs needed to create a new product or service?
• What price will you charge, and how much revenue will you create?
• What will your price and margin be?

Questions sellers may ask during readiness include:

• What deal terms do you need to make the sale worthwhile to your organization?
• Are there likely to be buyers who are willing to meet those terms?
• How will you invest the capital you receive?
• Will you restructure your organization after the deal? If so, how?
• What costs do you expect to reduce as a result of the sale?
• How will the sale affect your valuation?

“Those sorts of decisions should happen prior to diligence,” Sittema said. “It’s very rare that diligence changes these decisions. An organization that goes through a proper M&A lifecycle will think through these things even before they begin working with a third-party advisor on diligence.”

Prepare for detailed questions

In today’s environment, buyers are asking detailed questions that extend far beyond financial performance and projections. Buyers want a deep understanding of supply chain, technology, human resources and tax issues that all have the potential to significantly affect a deal.

Sellers need to be prepared for those questions. Armed with the understanding of their financials and operations, they need to have a clear, supportable forecast for the future performance of the asset they are selling.

In addition, sellers need to have a comprehensive explanation for the performance of the asset over the past few years and for its future prospects. Third parties sometimes help develop that narrative.

“If you’re selling a business, you need a good story,” said Grant Thornton Transaction Advisory Principal Eric Downey. “You need to support that story with substantiating documents, calculations, estimations and data. And then you need to be able to relay that story to potential buyers.”

That story needs to be reasonable and supportable because of the highly detailed due diligence that buyers are conducting in the current environment. If a buyer agrees to pay a handsome price based upon a seller story that’s partly fiction, both parties may suffer later.

Downey has seen instances where deals were close to the finish line when the buyer discovered inconsistencies with the seller’s model that soured them on the transaction. In some cases, a buyer in this situation may insist on adding substantial earnouts to the deal — essentially requiring the seller to make a financial commitment to the projections.