2015 has been a banner year for M&A, with momentum across market segments and a spike in the size and value of deals. Strategic buyers have driven most of this and more is expected next year, especially in technology, digital media and of course, the IoT, where the overall market for connected things is expected to expand by double digits yet again. As strategic planning for year-end and for 2016 continues, decision makers planning for an exit or major transaction next year should keep a few things in mind.
- Sellers and Buyers have a similar goal: maximizing value. Sellers want the highest price; buyers want the best price. Both sides to an alliance or acquisition should understand that a potential deal must have the potential to create “joint value” that exceeds what either could achieve on their own. That means stepping back to think about why before considering how. I recommend Professor Ben Gomes-Casseres book: Remix Strategy: The Three Laws of Business Combinations for starters. An easy read and a plain, practical guide to how to think about M&A, the book sets out dozens of examples and illustrations of successful deals and how to approach acquisition strategy. The unexamined deal often is not worth doing! (You can hear Ben share his wisdom directly at our upcoming event.)
- Buyers don’t want Seller problems to become their problems. Every major deal starts with due diligence, and that means corporate books and records and significant contracts should be in good order. Now is the time to complete stock option or restricted stock grants, estate-planning transfers or issuances long promised but not papered. In connection with new grants or stock awards, the company may want to consider securing or updating a so-called 409A valuation of the business, to establish a baseline before a significant transaction. Also, consider necessary changes to important contracts, leases or customer agreements. Better to negotiate those now, instead of during the compressed time of a contemplated sale.
- A Competitive Process is the best answer to the question: What’s Market? Sellers often make the mistake of talking to only one potential partner or reacting to an unsolicited term sheet from one interested party. After all, in many industries, the players know each other and the conventional wisdom is that only one or two potential acquirers are likely to express interest or actually consummate a transaction. Here, as in many cases, conventional wisdom could be wrong. Due diligence commences, negotiations quickly follow and the team finds itself confronting the often difficult choice of status quo versus sale to a particular buyer as the only alternative. Remember: terms, conditions and valuations improve only in the context of a competitive process, with multiple suitors bidding against one another. The executive team should consider how to create such a process or meet with experienced investment bankers who know how to make that happen.
- A Deal is not a Strategy. Transactions should further a growth or exit strategy; a deal is not necessarily an end in itself. (See Remix Strategy above!) Projections for year end and for years beyond should include a go-it-alone strategy, with realistic plans for cash flow, including any necessary equity or debt infusions. Hope for a game-changing transaction is not a substitute for a real-time financing strategy. Chances are, finding and negotiating the right transaction will take months, especially if a competitive process is in play. Any team would want the leverage of continuing the business in the ordinary course while the auction/sale process is ongoing.
- Go back to basics for capital. If the company needs a capital infusion, identify the dollar amount and the investor “target audience.” Be creative and think broadly. Sources of capital have changed dramatically over the last few years. Typically, a round of less than $2 million means friends and neighbors and an angel or two. For a financing round of up to $7 million, the company could pursue a combination of angels, a receptive venture capital investor, and possibly a private equity firm interested in the market sector. Terms for those transactions vary widely, and the company will need to pay careful attention to investor expectations, especially as to the timing for return on investment. Your legal and accounting advisors should take an active role in shaping the financing strategy.
- Start thinking about taxes: paying or saving! The company should be engaging its accountants and lawyers about tax and structure planning now. Thoughtful structural changes now could yield significant efficiencies next year, especially for employee retention and compensation packages that need to be in place to keep the team aligned. Also, if the team is not familiar with earnout structures, which provide for contingent purchase price payments over time, they should consult their legal and tax advisors and get up to speed.
All signs point to 2016 as another banner year for M&A. A proactive strategy about how to think about and plan for M&A will best position your company for what lies ahead.
Lawrence Gennari is a partner at Gennari Aronson LLP and an adjunct professor at Boston College Law School, where he has taught courses on mergers and acquisitions and corporate and entrepreneurial finance. He can be reached at lgennari@galawpartners.com.
