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Preparing your company for a sale: Tips, strategies & tools to keep in mind

When deciding to sell your company, you can either choose to sell it in its current condition or prepare for a Merger and Acquisition (M&A).

A strategic M&A plan can considerably increase the sale value of your venture and should ideally be your chosen plan of action. You will make your company more attractive to potential buyers if you address your businesses weaknesses well in advance of any due diligence or negotiation processes. Here are a few simple steps that can help you maximize the value of your business.

Create a pre-M&A improvement plan

Before devising an M&A improvement plan, you must first take stock of the different aspects of your company such as:

  • Identifying areas that are doing well, those that are performing below average and need your intervention, and those that need a complete overhaul.
  • Creating a timeline and dedicated project to address any identified concerns and complete upgradations.
  • Assigning resources that you are willing to allocate for handling the M&A process and internal performance improvement initiatives.

Remember, recognizing the needs of your company early on will help put you in a better position during negotiations. Investors are usually looking for small companies with the potential for larger projected growth in the future. Many owners often make the mistake of discontinuing investments to improve a company once they decide to exit. Instead, this is the time where you must attempt to increase the value of your company by investing in equipment and upgrading processes to lead to higher performance. Your company’s value is directly linked to how it performs in the period leading up to, and during the M&A.

Keep your plans to yourself

Avoid disclosing your plans to enter an M&A until after the deal is sealed. While consulting with your legal advisors and accounts department, emphasize the need for discretion even if their profiles are contractually bound in non disclosures.

The news of your plans to sell the company might induce panic in your staff, generating uncertainty, which in turn might devalue the business right when it needs to be performing at its peak. Instead, train your employees to be able to carry on tasks in the absence of your supervision. Develop repeatable processes and create quantifiable parameters to ensure that your business continues to grow even after your departure.

Pay close attention to managerial staff and resolve any internal conflicts. Take every measure possible to avoid high turnover before M&A. Remember a high rate of employee retention is the sign of a healthy business!

Increase your EBITDA

Your company’s earnings before interest, taxes, depreciation and amortization will be the most likely metric used to evaluate its worth. The higher your EBITDA, the larger settlement you’re likely to receive. Thus, instead of focusing on gross revenue, attempt to push your EBITDA. Analyze your expenses to highlight funds that can be reallocated to increase your working capital, BPS, and boost EBITDA. If needed, hire extra marketing personnel and increase your top-line growth to maximize earning potential.

An investor is likely to evaluate your company’s track record of sales to estimate its projected earnings. It then makes strategic sense to expand your marketing team while preparing for an M&A. You can also choose to set up a revenue juggernaut in this phase to help realize hidden potential.

Prepare for a financial audit

A financial audit is a likely requirement before an M&A. Hire a reputable firm to conduct your own audit before entering negotiations in order to help improve the financial health of your business

A professional audit will also enable you to better understand what potential buyers might be looking for, give you a sense of what a GAAP audit constitutes, and having this data at your disposal will grant you an advantage during negotiations.

During the M&A process make it a point to highlight a history of compensation. Many entrepreneurs tend to combine their personal financial portfolios with their company’s. It is always advisable to clearly demarcate a separation early on and pay yourself a salary which adequately covers your expense and leaves behind a safety net to sustain your lifestyle.

Prepare a 3-year financial projection

A plan which includes clear financial projections is critical to garnering credibility for your company during M&A presentations. While surpassing quantifiable goals and milestones can add value to your company’s acquisition offer, failing to meet set financial targets can seriously jeopardize a sale. Hence, be certain that the projected numbers are achievable in the proposed period.

There are a couple of measures that you can put into place before framing your proposal. These must include knowing the Strengths, Weaknesses, Opportunities and Threats (SWOT) of your business. A SWOT analysis is critical before attempting to prepare a financial projection. Setting achievable goals and highlighting your competitive sustainability attests to the business acumen of your enterprise, while a well-planned execution of the presentation puts the ball in your court during negotiations.

Identify potential buyers

Networking in the right circles is key to finding investors that best suit your agenda. Keeping up-to-date with industry trends, and potential investors’ investment portfolios can help you pitch your company for sale. Identify a list of potential buyers, establish contact, and foster their interest in your enterprise.

Treat buyers like clients, highlighting how your company can best serve their interests. Share your projected milestones with prospective buyers and highlight a potential business that might profit from partnering with your company. Paint them a larger picture of where you see your company in the years to come, focusing on how they would benefit from processes that you have already put into place and in motion for a seamless transition/integration.

Prepare for final negotiations

If you’ve successfully made it to this stage, you will now be the best judge of the value of your company. Armed with a SWOT analysis, a successful 3-year projection, and favorable EBITDA, here’s the last negotiation tactic to note so you have the upper hand, ensuring you have addressed any misdemeanors from your company’s past.

Investors will jump at the opportunity to poke holes in your company’s reputation in order to offer a lower buyout. By acknowledging any mistakes from the past, you can gain control of M&A negotiations. Remember to state things as they are, and not provide explanations or empty apologies. Set-up the circumstance that might have led to a disruption and focus on the measures you put into place to contain an unfavorable situation and prevent future occurrences. Assign a short duration to address these concerns right before commencing M&A proceedings, effectively warding off any possibilities of them being brought up later to throw you off track.

Assess the best exit option

Ultimately, while selling a business for considerable profit is the dream of many contemporary entrepreneurs, when the opportunity finally presents itself it can prove to be a surprisingly emotional decision. Before making the final leap and handing over a company that you have worked several years to build, it is important for you to consider other options that might be at your disposal. Signing over all rights to your company is only one among a plethora of alternatives to capitalize on your hard work. For example you could:

  • Opt for a part liquidation, where you can either maintain control of operations or become a silent investor. This will enable you to retain a stake in the business which you can decide to sell during a larger buyout in the future.
  • Open your company’s portfolio and raise capital through equity, helping your company become larger before exiting at a higher value in the future.
  • Hire a CEO and play an advisor role. If you are feeling overwhelmed by the growing size of your enterprise and feel like you are not being able to contribute to its growth and take it to the next level, you can hire a CEO with relevant industry experience and take on an advisory role for yourself, focusing on the parts of the business process that catch your fancy.

With many points to consider, preparing your company for a sale is by no means an easy task and can be very emotional! However, following these aforementioned steps will at least allow you to realize the full value of your business and give you the due credit for all the years of hard work you’ve put in.

 

financing mergers & acquisitions

6 Methods of Financing Mergers & Acquisitions

Mergers and Acquisitions are parts of the natural cycle of business. A merger or acquisition can help a business expand, gather knowledge, move into a new market segment, or improve output. However, these opportunities come with expenses for both sides. Standard merger deals typically involve administrators, lawyers, and investment bankers even before the total acquisition cost is considered. Without a virtual dataroom and a sizable amount of cash on hand, a company will have to find alternate methods of Financing M&A. Below is a detailed look at the best financing options available today as well as information on the ones to avoid.

Exchanging Stocks

financing m&aThis is the most common way to finance a merger or acquisition. If a company wishes to acquire or merge with another, it is to be assumed the company has plentiful stock and a solid balance sheet. In the average exchange, the buying company exchanges its stock for shares of the seller’s company. This financing option is relatively safe as the parties share risks equally. This payment method works to the buyer’s advantage if the stock is overvalued. Here, the buyer will receive more stock from the seller than if they’d paid in cash. However, there’s always the risk of a stock decline, especially if traders learn about the merger or acquisition before the deal is finalized.

Debt Acquisition

Agreeing to take on a seller’s debt is a viable alternative to paying in cash or stock. For many firms, debt is a driving force behind a sale, as subpar market conditions and high interest costs make it impossible to catch up on payments. In such circumstances, the debtor’s priority is to reduce the risk of additional losses by entering into a merger or acquisition with a company that can pay the debt. From a creditor’s standpoint, this is a cheap way to acquire assets. From the seller’s point of view, sale value is reduced or eliminated. When a company acquires a large quantity of another company’s debt, it has greater management capabilities during liquidation. This can be a significant incentive for a creditor who wants to restructure the company or take possession of assets such as business contacts or property.

Paying in Cash

A cash payment is an obvious alternative to paying in stock. Cash transactions are clean, instantaneous, and do not require the same high level of management as stock transactions. Cash value is less dependent on a company’s performance except in cases involving multiple currencies. Exchange rates may vary substantially, as seen in the market’s response to the British pound after the UK voted to leave the European Union. While cash is the preferred payment method, the price of a merger or acquisition can run into the billions, making the cost too high for many companies.

Initial Public Offerings

mergers & acquisitionsAn initial public offering, or IPO, is an excellent way for a company to raise funds at any time, but an impending merger or acquisition is an ideal time to carry out the process. The prospect of an M&A can make investors excited about the future of a company, as it points to a solid long-term strategy and the desire to expand. An IPO always creates excitement in the market and, by pairing it with an M&A, a company can spur investors’ interests and increase the early price of shares. Additionally, increasing an IPO’s value with a merger or acquisition can increase existing share prices. However, market volatility makes this a risky way to finance a venture. The market can drop as quickly as it rises, and a new company is more susceptible to volatility. For these reasons, the popularity of the IPO is declining with each passing fiscal year.

Issuance of Bonds

Corporate bonds are a simple, quick way to raise cash from current shareholders or the general public. A company may release time-definite bonds with a predetermined interest rate. In buying a bond, an investor loans money to the company in hopes of a return, but bonds have one big disadvantage: once they’re bought, the money can’t be used until the bond’s maturation date. The security makes bonds popular with long-term, risk-averse investors. Today, companies are taking advantage of low U.S. interest rates to fund M&A. However, the trend is tied closely to the cost of borrowing, and bond issuance is only a good value if the buyer can cheaply access credit and has a clear goal.

Loans

It can be costly to borrow money during a merger or acquisition. Lenders and owners who agree to an extended payment arrangement will expect a reasonable rate for the loans they make. Even when interest is relatively low, costs can quickly add up during a multimillion-dollar M&A. Interest rates are a primary consideration when funding a merger with debt, and a low rate can increase the number of loan-funded transactions.

In Conclusion

Where cash is not an option, there are many other ways to finance a merger or acquisition, many of which result in an effortless, lucrative, and quick transaction. The best method for a firm to use depends on the buyer and the seller, their respective share situations, asset values, and debt liabilities. Each method of funding a merger or acquisition comes with its own hidden fees, commitments, and risks, and it is the buyer’s and seller’s responsibility to practice Due Diligence during a transaction. However, for most companies, the results make all the effort worthwhile by creating a more diverse, stronger firm that can cover the cost of M&A with funds to spare.

Virtual Deal Room

The Basics of the Virtual Deal Room

With the increasing prevalence of the virtual Deal Room as a merger and acquisition tool, there’s more of a need to understand the role of Data Rooms in the M&A process. Equally important is the need for those involved in mergers and acquisitions to learn how to set them up properly and maximize their effectiveness. In this guide, potential clients can learn about setting up a virtual deal room for an M&A transaction.

The Role of the Dataroom in Mergers and Acquisitions

A virtual deal room is an online repository where information is stored and accessed through documents. This method of storage and document sharing is designed mainly for mergers, acquisitions, IPOs, due diligence, and other uses involving buyers’ and sellers’ sensitive information. In the context of M&A, Virtual Data Rooms serve as a placeholder for information related to divisions, units, and companies being acquired. Everyone involved in these Mergers & Acquisitions has access to this sensitive information, while all other parties are excluded.

Virtual Deal Rooms Can Reduce Costs

Maintaining a physical deal room can be costly. Someone must be paid to keep the facility clean and provide security and to print, move, and copy documents. With a virtual Deal Room, costs can be cut because it requires a smaller maintenance crew. In a similar way, moving to and from the physical data room’s location can be expensive, especially for remotely located deal rooms. With virtual deal rooms, the expense and hassle are substantially reduced.

Data Rooms Increase Corporate Efficiency

virtual deal room increase efficiencyIn the traditional M&A environment, obtaining permission to access, view, copy, and print information can take time. It’s a tedious and time-consuming process to find the information a client needs in a room full of file cabinets, and the difficulty can be compounded when multiple parties need access to the information at the same time. Because everything is done online in a virtual Deal Room, it’s easy to disseminate important information to different parties with just a few clicks. Faster access is one of the main reasons why virtual deal rooms have become increasingly popular.

Virtual Rooms Offer Additional Security

A virtual room is designed with various security features to ensure controlled access and confidentiality. Only involved parties are allowed to access the data within the deal room, and various clearance levels are maintained. The online environment makes it easier to track and monitor viewing, logging, and other forms of access. The client has complete control over how information is shared.

Convenience and Comfort

Traveling to and from a physical location to retrieve information can be expensive and inconvenient. With a virtual Deal Room, clients can The Basics of the Virtual Deal Room with a stable broadband internet connection. The best data room companies work to protect clients’ sensitive data with state of the art technologies.

Trends in Merger and Acquisition Data Rooms

The virtual data room has progressed significantly from its initial incarnation, which was used primarily for legal due diligence. Subsequent updates have added many capabilities to deal rooms, turning them into a medium to conduct an M&A from start to finish. A 2014 report showed that there are over 240 virtual Deal Room providers available, making it a multimillion-dollar revenue stream.

A Variety of Tech-Based Features and Functions

M&A virtual data rooms are becoming more advanced with the inclusion of features geared toward higher-efficiency due diligence. Some examples are:

  • Dynamic indexing, which is useful when uploading or rearranging out-of-sequence documents.
  • Flexible file formatting accommodates formats such as Word, JPEG, GIF, PDF, and others. This saves time because it eliminates the need to convert files just for storage purposes.
  • Question and answer functions, which are useful when buyers need to verify the data room’s contents with sellers. Where inquiries over the phone or through email would take time, today’s questions can be routed through the data room to save time and money.
  • Restricted usage, which can keep certain documents under wraps while others can be accessed. Contingent restrictions can be permitted. For instance, one set of users can be allowed to view documents, but not copy or print them.

Setting Up a Virtual Data Room in a Merger or Acquisition

Virtual data rooms can be set up internally or externally. With an internal data room, the seller provides and oversees the room. External rooms are outsourced to third-party providers. Many businesses resort to full or partial outsourcing, and they must compile documents such as:

  • Financial statements and reports
  • Corporate books
  • Employee paperwork
  • Agreements and contracts
  • Insurance policies and legal documents
  • A list of assets

Whether done externally or internally, the steps to set up a data room are the same. For the purposes of this guide, however, assume that the client is hiring an external vendor to manage the storage of important data during a merger or acquisition.

Keeping it Simple

Companies should set up a virtual deal room that suits the purpose, and managers should consider that a user may not have the same level of familiarity with the system. Here, a simple interface can work to everyone’s advantage. However, it’s important to include useful functions where possible. When companies choose reliable Virtual Deal Room providers, they can be assured that their sensitive information is safe and easily accessible during mergers and acquisitions. By learning more about the process, clients can choose a provider that offers the services and security they need at a reasonable price.