M&A Advisor Corner Tip

Cybersecurity a buyer priority

New research from Datasite reveals that cybersecurity is the leading issue that causes buyers to withdraw from a deal in due diligence.

When asked how often a deal does not progress due to an issue uncovered in due diligence, deal makers said about 1 in 10 deals fell through. Among the problem areas most likely to kill a deal, cybersecurity issues led the pack at 36%, followed by financial weakness, excessive valuation, financial irregularities, and leadership issues.

Talk to your technology advisors about data security issues and consider securing an external audit from a third-party firm (ask your CPA for a referral) to ensure your information management practices are up to snuff.

Market Pulse Survey – Quarter 4, 2020

Presented by IBBA & M&A Source

Financing M&A in a pandemic

One year ago, buyers were looking for talent. Every company we talked to was up against the same problem – there was so much opportunity to be had, but none of the employees to make it happen. It’s amazing how much can change in year.

Business buyers today are coming to the table for a host of reasons. The fortunate ones who benefitted from a “COVID-windfall” (e.g., tech, grocery, janitorial…and now, dry ice manufacturers) will be looking to capitalize on that success with acquisitions to drive long-term growth.

Banks are willing to lend, but they have pulled back slightly. Traditionally, lower middle market deals have senior debt at an average of 3x EBITDA. Now that’s down to 2.5 or 2.75x, according to GF Data. In 2020, senior lending in M&A hit the lowest we’ve seen in five years.

To compensate, the capital stack is being filled in through increased buyer equity and increased rollover equity. Rollover equity is when the business owner or management team retain a stake in the enterprise.

Buyers like it when sellers keep some skin in the game. It shows they have faith in the business and are committed to its ongoing success. For businesses valued between $10 million and $25 million, rollover equity accounted for 13.2% of deal funding through November 2020.

We saw an uptick in buyer equity in Q2 2020, likely stemming from buyers who were committed to getting deals done, even during the initial chaos after the pandemic hit. In the first nine months of 2020, equity share on platform deals averaged 54.5%. The quarterly splits, though, are notable: 1Q-53.2%; 2Q-61.6%; 3Q-51.4%.

We are still seeing buyers bringing a greater share of capital to the table in Q4. Anecdotally, in one recent Wisconsin deal we managed, the buyer opted not to take all of the debt available to them. They’re financing the deal with senior debt at just over 2x EBITDA with the balance in buyer equity and management team rollover equity.

In this case, the buyer is acquiring a manufacturer running at capacity. By not fully leveraging themselves in the transaction, they’ll have a strong equity position to support significant new investments to increase production. Similarly, other buyers are pulling back on leverage in order to maintain some breathing room in case the pandemic gets worse before it gets better.

At the start of the pandemic most industry experts would have told you to expect an increase in earnouts in order to get deals done, but that hasn’t happened. Sellers typically don’t like earnouts, and because the demand for COVID-proof businesses remained strong in 2020, sellers were generally able to avoid those deal terms.

As risk and uncertainty subside in the months ahead, we may see a return to more typical funding trends. Interest rates are at historic lows and cheap debt will help more buyers and sellers bridge their valuations gaps.

This update is presented by GM Corporate Solutions in association with our partner Cornerstone International Alliance

M&A Advisor Corner Tip

You’re killing me Smalls!

If we’ve said it once, we’ve said it a thousand times: “Time kills all deals.” Essentially the longer it takes an M&A transaction to reach the closing table, the more likely that deal is to fizzle and die a painful death.

A lot of it just comes down to human nature. At the start of a deal, people are invested and motivated. As the process drags on, tensions rise. Small issues are more likely to snowball into big issues.

So what are some of the prime culprits slowing down a deal? Inattentive, overburdened advisors and/or buyer agents can be to blame. It’s essential that everyone on your deal team sticks to a schedule and keeps the transaction moving forward.

You can do your part too by ensuring financial and other business information is up to date. Ideally, you and your advisor will have gathered most relevant due diligence information before you even go to market. That way, buyers see an organized, committed team ready to move forward.

Market Pulse Survey – Quarter 3, 2020

Presented by IBBA & M&A Source

M&A buyers may need to move quickly in 2021

One year ago, buyers were looking for talent. Every company we talked to was up against the same problem – there was so much opportunity to be had, but none of the employees to make it happen. It’s amazing how much can change in year.

Business buyers today are coming to the table for a host of reasons. The fortunate ones who benefitted from a “COVID-windfall” (e.g., tech, grocery, janitorial…and now, dry ice manufacturers) will be looking to capitalize on that success with acquisitions to drive long-term growth.

Other businesses who weren’t as fortunate may be looking for opportunities to add resilience and diversification in their business models. Innovators and technology leaders will be snapped up as buyers look for help pivoting in the COVID-19 economy.

And as uncertainty continues to upset consumer behaviors, some businesses will see acquisition as their most likely path to growth. When organizations can’t grow organically, acquisition becomes a means to get there, with the plus-side that economies of scale should drop a higher percentage of profits to the bottom line.

Here’s what’s going on in the market and what it means for organizations contemplating an acquisition:

Growing pool of M&A targets: President Biden’s campaign tax plan included a sizable increase in the capital gains tax – nearly double today’s rate. While those plans may not come to full fruition, many sellers are entering the market now to get ahead of potential tax increases.

Those sellers, as well as businesses distressed by the pandemic, will create a growing pool of M&A targets. Analysts are predicting 2021 will be a banner year for M&A activity.

Seller urgency: A rush to complete deals by year-end 2021 (to get ahead of possible tax changes) means deal teams who have locked in their strategy and are prepared to act fast will have the advantage over buyer teams taking a more relaxed “we’ll know it when we see it” approach.

At the same time, seller urgency could provide a logistical challenge for deal teams who still haven’t returned to pre-pandemic due diligence habits. We’re still months out from widespread vaccination in the U.S., and that means deal teams will need to rely on virtual processes for due diligence and negotiation.

Owner fatigue: When trying to hire new talent, recruiters reach out to passive job seekers, that is individuals who are employed and not looking for a job. The same dynamic can happen in M&A when a company launches an acquisition search. They reach out to “passive sellers” who are running their company and not on the open M&A market.

Right now, we’re getting a much stronger response to acquisition inquiries. Concerns about employee health and supply chain issues weighed heavily on business owners in 2020, and we’re seeing an uptick in people who simply want to move on.

Buyer competition: It’s estimated that private equity alone has $1.5 trillion in dry powder, aka cash they need to put to work for their investors. Private equity demand helped keep valuations strong in 2020, and should help us maintain a seller’s market in 2021, even if we see a boom in businesses coming to market.

And according to the PwC US Pulse Survey, 53% of US executives said their companies plan to increase M&A investment in 2021. The takeaway: If you’re planning to grow through acquisition, you won’t be the only one looking.

Valuations holding for COVID-proof businesses: There may be deals to be had for businesses distressed by the pandemic. But businesses unaffected by the pandemic, or those that bounced back quickly, are still selling near peak multiples – or even at a premium.

Banks have pulled back on lending just a bit, so buyers are filling out the capital stack with more of their own equity. We’re also seeing an increase in retained equity, in which the seller or their management team maintain a partial ownership stake in the new organization.

Likewise, we’re seeing an uptick in buyers who aren’t taking the full debt load available. By backing off on their leverage, they can keep themselves in a stronger financial position – just in case the pandemic would get worse yet before it gets better.

This update is presented by GM Corporate Solutions in association with our partner Cornerstone International Alliance

Are you investor-ready? – a business plan perspective

The current market is flooded with entrepreneurs seeking seed capital to kickstart their venture or growth capital to take their businesses to the next level. While various success stories are published in news every day, there is also a huge number of ventures that remain capital-starved due to some reason or the other. One of the main reasons for this is an inability to garner significant interest from investors.

To attract the attention of the investors and bring them to the discussion table an impressive business plan is a must. Any serious entrepreneur, whether venturing out the first time or a seasoned one, realizes the importance of the way information is communicated. A solid business plan captures & conveys the fundamentals of the business in the right manner by laying down a clear roadmap for the future.

For the business plan to be effective, it is pertinent that it covers all the aspects of a business and lays down a clear futuristic approach. The following are four key elements of an effective business plan:

1. About the Product: A well-laid description of the product to ensure that the vision is tied up with customers’ needs and market demands.

   
   

2. The Target Market: This is about understanding the customers of the product: who they are, what they need, how much they can spend, the alternatives available to them – direct as well as indirect, etc.

   
   

3. Business Strategy: This section tells the investors how well the entrepreneur knows the business they are engaged in and how well the business is equipped to engage with the competitive market by elaborating on a well-defined growth strategy for the future.

   
   

4. Financials & valuations: The entrepreneur should endeavor to forecast revenues & expenses optimistically and these should also be grounded on what’s realistically achievable. It could be helpful to consult an expert on this for an objective and professional viewpoint. This would help in arriving at the appropriate value of the business in its current state and what value it could reach to in the future.

Besides the above, certain other factors also need to be kept in mind to make the plan investor-ready:

1. Self-questioning everything that forms part of the business plan to ensure that the queries from investors could be addressed. This approach serves as a crucial tool in justifying the assumptions and risk factors/underlying assertions in the business plan.

2. It is important to keep the business plan clear and concise, free of jargon, well-researched, and formidable.

3. Being specific is quite important in every section. Focusing on what’s specific also allows in achieving brevity.

4. It is very important to keep coming back to the business plan periodically and updating it to cover the evolving market scenarios.

It takes a lot to prepare a robust business plan that presents the business case in the best way possible. A professional knows what the investors are looking for and helps to pinpoint the areas where improvements can be made.

We are one of the specialist transaction advisory firms in India. We assist our clients in formulating their business plan, financial planning, and also connecting them with the right investors for their business. Our team’s knowledge and experience across various sectors make us one of the most preferred firms for the corporate finance services required by various businesses.