Get better results with clear objectives and timelines
As the mergers and acquisitions environment begins to heat up again, organizations poised to execute deals need to be ready to move quickly when the time is right.
For buyers and sellers alike, transactions have the potential to create significant value or significant disruption.
Sometimes they create both.
To maximize the chances that a transaction will deliver the most value and the least disruption, organizational leaders need to have the discipline to commit to an effective M&A lifecycle schedule step by step. The deal readiness phase of the lifecycle centers on developing the tactics needed to execute on your deal strategy and ultimately to create value.
“M&A readiness starts with understanding the value you’re trying to achieve from a deal. You need a strategy for value realization that includes clear objectives and even timelines.”
“M&A readiness starts with understanding the value you’re trying to achieve from a deal,” said Grant Thornton Transaction Advisory Principal Rich Sittema. “You need a strategy for value realization that includes clear objectives and even timelines. On the buy side for example, this will mean a clear understanding of your purchase price tolerance as well as the synergies you expect to create once the deal closes.”
Readiness requires comprehensive business planning and financial modeling. Readiness activities include an assessment of potential synergies, development of diligence objectives, creation of an integration strategy, and development of the financing structure.
For organizations developing an M&A strategy, the time to conduct this readiness work may be now, as expectations of an upcoming rise in M&A volume are high.
Eighty-one percent of M&A professionals said in a Grant Thornton survey that wrapped up in February that they expected transaction activity to increase over the next six months. Their prediction held true, as deal count and deal value for the first half of 2024 is tracking 10% to 15% ahead of 2023, according to Pitchbook's Global M&A Report for Q2.
It’s expected that transaction activity could accelerate whenever the Federal Reserve begins lowering interest rates on a timeline that remains highly uncertain. It seems that many organizational leaders who are eager to make a deal are waiting for conditions to get just a bit better.
The organizations that maximize their M&A readiness will be the most prepared for a deal that delivers value — and not disruption — when the time comes.
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.
“Everybody loses when your story is not aligned with reality.”
In other cases, a buyer may back away from the deal entirely.
“This can really degrade the value in a sale,” Downey said. “If you lose the final bidder, you can’t just go to the next highest bidder you rejected a month ago and have them honor their previous bid. Everybody loses when your story is not aligned with reality.”
Put another way: When you lose trust with a buyer, it’s difficult to get it back. In one case of broken trust that Downey observed, Grant Thornton performed buy-side diligence on a seller model that was found to be aggressively optimistic. The historical earnings were stated accurately, but the sell-side team’s performance projections were overestimated.
In the end, the purchase price was reduced by one-third.
“The seller didn’t make sure their story was aligned, and it came back to bite them,” Downey said.
Buyers generally are willing to pay a fair price for a deal that will create significant value. By undertaking the appropriate deal readiness activities and developing strategies based on supportable models, all parties can benefit from that value while minimizing disruption.
Contacts:
Richard J. Sittema
Principal – Transaction Advisory Services, IT Transaction Advisory, Healthcare and Manufacturing Practices
Grant Thornton Advisors LLC
Richard Sittema has more than 15 years of experience in business consulting. He started his career in business analyst roles on large-scale systems integration and IT-related consulting engagements for public, private and not-for-profit organizations.
Cleveland, Ohio
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- Manufacturing, Transportation & Distribution
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