M&A Success: How Midsize Sellers Cash Out


By Allan Tepper

Often, parties interested in making a purchase are serial buyers, hence their advantage. But for midsize sellers, this will probably be the one and only time they sell. Sellers spend the better part of their lives building a company so they can now cash out and ride into the sunset.

Unfortunately, mergers and acquisitions can be very challenging—and I’m not even talking about what happens after the deal. I’m solely focusing on the deal itself. There are many pitfalls and traps that await, especially if this is your first time.

Here are five items that will help sellers obtain the value they created:

Project Over Personality

If you don’t get a good feeling from the buyer in the first few minutes, you should give passing some real consideration.

In the end, the outcome of pending mergers and acquisitions will hinge on whether you can keep both parties focused on the project (i.e. the deal). Regrettably, the matter can shift to center on the personalities involved with the deal. And that’s usually the beginning of the end.

It may start as a “chemistry” issue between two individuals, but it can quickly devolve into a lack of trust. You began the deal with plenty of trust, but what happened? Well, you just learned the price changed. Maybe it’s legitimate, but now your antennae are up. As soon as the win-win deal becomes a perceived win-lose, it’s no longer about the deal. Now, it’s about you versus them. Unfortunately, the lack of trust diminishes value.

So, how can you avoid those barred-knuckled conversations? Say what you mean and mean what you say. The letter of intent is a great place to start. Make sure the critical aspects of the deal are captured in the letter. The letter will be turned into a contract, so if there are missing parts and surprises once the lawyers get involved, the deal may crater.

Plan To Win

For sellers, planning is the absolute key to success.

Your goal is to win the war, not a battle, so start planning early in the process. What do you want to accomplish by selling your company? Do you want to sell to a private equity firm or a strategic competitor? Would you want a position in the merged company? How long will you stay after the deal closes? You will need to know the answers to these questions to guide you through negotiations.

Even the smallest details matter. For example, gather all your required documents in the deal room to make sure the process goes smoothly. We had a client that had several contracts where the executed version could not be found.

Failing to plan means planning to fail. Good planning should avoid seller’s remorse.

Fix Your ‘Hair’

Negative items—things that give buyers consternation—need to be disclosed right away. Bad news, also referred to as “hair” in M&A speak, doesn’t age well. Worse yet, don’t create an opportunity where the buyers find out about the negative stuff first. This is not a birthday party; surprises are bad for business.

When you present the negative news, make sure you include how it is being addressed. If the buyer thinks he is purchasing $5 million in inventory, he will be surprised to learn $3 million is obsolete. So, take a write-down to ensure the buyer gets quality inventory. Then, communicate your solution.

Of course, performing due diligence on the buyer can go a long way. Sometimes, seemingly negative issues can be turned into positives. For example, if 80% of your revenue is coming from one company in a specific sector, it could be seen as a negative for your company, but it could be viewed as the missing piece for a larger company with a diverse customer base.

Use The Right Numbers

Numbers are the quickest way to build reputation and trust. They also are the quickest ways to kill the deal.

The Chief Financial Officer should play the role of facilitator, gathering all the key players on the sell side. At that point, the CFO should go through the key numbers of the business that are important to the deal. Then, the other key players should highlight their key numbers that dovetail back to the CFO’s numbers. And then everyone should memorize their numbers. In my experience, many companies fail to do this part. Do you know what happens when the warehouse manager says you have $3.5 million in inventory, the CEO says it’s closer to $2.5 million and the CFO says it’s $3 million? The buyer runs out the door.

Developing the right policies and procedures will also help you arrive at the correct numbers. Closing your books quickly and accurately is more about trust than accounting at this stage. Don’t allow poor quality of information to erode value and crater the deal.

Quality Counts

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a measure of cash flow.

And that’s important because it plays a large role in determining your company’s valuation. Every industry has a multiple, which will be used with your EBITDA to determine fair market value.

But here’s where it gets interesting. Even the most scientific equations contain elements of art.

You should conduct a sell-side quality of earnings analysis to create an adjusted EBITDA. For instance, you may want to add back the CEO’s salary because the acquiring company already has one. The purchasing company, however, argues that they will need to hire someone to fill a part of the role left by the outgoing CEO.

You should consider the past and the future when thinking about what quality of earnings means. If you are selling an event production company that derives a large part of its revenue by hosting several annual events on set dates, what happens if those dates change? How much would quality of earnings dip? If you are selling a company that owns ski resorts, how will climate change impact future earnings?

Forward-looking statements carry many shades of gray. Analyzing quality of earnings will remove a big part of the mystery and increase the chances for a successful merger.

(Allan Tepper is a co-founder of CFO Consulting Partners, who leads the firm’s Business Services Practice. His expertise includes providing interim CFO services, as well as sell-side M&A guidance and implementation.)

Updated: May 31, 2023

About the author
Paul Schmid of ArentFox Schiff LLP is a member of XPX Greater Boston

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