m&a Archives

Common M&A Pitfalls: 7 Mistakes You Should Never Make

September 8, 2021 by Sun Acquisitions

Why do 7 out of 10 merger and acquisition deals fall through?

In today’s post, we’re going to discuss seven of the most common reasons behind the failures of even the most promising M&A arrangements.

Mistake #1 Having No M&A Plan

When Benjamin Franklin said, “If you fail to plan, you’re planning to fail,” he wasn’t wrong. And we’ve seen this time and time again among buyers and sellers.

As a buyer or seller, you have an ultimate goal – the purchase or sale of a business. In order to successfully achieve this goal, there must be a comprehensive strategy in place.

A well-thought-out plan is exactly the type of strategy you need to make your acquisition or merger a success.

But what’s contained in such a plan? Mostly questions such as:

What’s your ultimate play i.e. diversification, geographic expansion, talent acquisition?
How do you intend to finance this M&A?
Who will be your M&A advisory team?
What’s your ROI model?
What deal size are you after?

Summary: Know what you want to execute, know what your end goal is, and what success looks like for you.

Mistake #2 Valuation Errors – Overpaying

Business valuation is the process of determining a company’s fair value. Valuations are typically done as preparations for an acquisition.

As a seller, it gives you an unbiased view of how much leverage you have while negotiating with buyers. However, businesses aren’t always valued correctly.

When valuation errors are made, buyers may overpay for the business which is part of the reason why more than 70% of M&A transactions perform poorly in terms of meeting their ROI targets.

So how can you as a buyer be assured that you’re not overpaying for a business?

One of the best ways is to have any business you wish to purchase independently valued by third-party valuation experts.

This also has secondary benefits which include access to comps and various other financial industry insights.

Summary: “How do you avoid overpaying? How do you avoid making valuation mistakes? Hire valuation experts.”

Mistake #3 Assuming Too Much Debt

Yes, we’re in a buyer’s market. Interest rates are exceedingly favorable but this is no reason to be reckless and take on more debt than you need to.

In the long run, because of the floating nature of rates, your monthly principal might end up increasing making it difficult to keep up with repayments.

You need to carefully think about all of this as you factor different scenarios with your interest rates model. It is better to err on the conservative side here.

Summary: Interest rates are at historical lows. Money is so cheap and organic growth is very hard.

Mistake #4 Overestimating Growth

Having a growth model is advantageous as it helps you gain a clear idea of what you’re expecting once you’ve acquired the business. However, ego and emotion tend to drive these models.

This leads to cloudy judgments and faulty growth and synergy models. Leave emotion at the door when dealing with sellers. Be forthright and ask them direct questions about the best ways to grow the business. After all, no one knows the business better than they do.

Find out what strategies they have tried, which have worked, which haven’t, and why they think those initiatives didn’t work. The insight they give will be invaluable and will give you a better overview of what growth is actually possible with the business.

Summary: “People pay owners for what they built, but they buy a business for what they think they can do with it in the future.”

Mistake #5 Insufficient Due Diligence

Due diligence is one of the most complex steps of M&As. There are so many dynamics and moving parts to consider and factor, and even more so now with the COVID-19 situation.

As someone unfamiliar with the business and perhaps even the industry, it cannot be emphasized enough how much you need an M&A advisory team on your side.

They will underscore and examine things such as:

The positive and negative impacts of COVID-19 on the business
The historical performance of the business
Recommendations for leverage and debt

Summary: Diligence is hard. It’s taken a whole new perspective because of COVID-19 and there is now so much more to consider.

Mistake #6 Poor Balance Sheet Evaluation

The most common financials we see people stressing about are the tax returns and the P&Ls. While these are important, of even greater weight are the balance sheets.

For it is the balance sheets that inform you of the operating costs. How much you’ll actually need on a daily basis to keep things running smoothly.

The goal of studying the balance sheets should be to understand the networking capital needed by the enterprise to keep its doors open. It can be worked out as follows:

Networking Capital = Current Assets + Current Liability

Summary: People don’t spend enough time with the balance sheet. The balance sheet will tell you a lot including how much cash you need to operate daily.

Mistake #7 Deficient Integration

When it comes down to integration, there should be a key point person whose sole responsibility is the oversight of everything to do with amalgamation.

This lead will be in charge of the three pivotal post-integration areas: people, culture, and communication.

Integration should not be an afterthought. Integration considerations should begin during the due diligence phase so that from Day One, everything runs as smoothly as possible.

Summary: Integration touches every part of the operation. A detailed plan is required here. Somebody should own the integration process.

What Next?

You don’t have to make the mistakes we’ve discussed in this post.

If you’re not sure how to navigate the buyer/seller market and you’d like to find a way forward, our team of seasoned M&A experts is always ready to help.

Sun Acquisitions boasts an experienced M&A team that can assist you with preparatory efforts whether you’d like to buy or are selling a business. Don’t hesitate to contact us.

What Value Drivers Should You Consider During Business Valuation?

July 13, 2021 by Sun Acquisitions

How to get the best business valuation?

It’s a topic of great interest for both buyers and sellers.

According to Google’s Keyword Planner, on average 10,000 monthly searches are conducted on the term business valuation alone.

Clearly, there are scores of people eager to understand valuation and its importance during mergers and acquisitions.

It’s a no-brainer.

Being prepared allows you to maximize your returns as well as minimize your risks.

And by giving careful consideration to value drivers, sellers will be able to position the company favorably to show good cash flow and reduce apparent risk; while buyers know which metrics to keep an eye on.

So, before we take a look at the key value drivers to focus on, you may be asking but what are value drivers anyway?

Let’s find out.

Value Drivers Defined

The Corporate Finance Institute gives us a clear definition of business valuation drivers or value drivers. These are:

“…factors that increase the value of a business in the event of a sale opportunity.”

It follows then that every business has value drivers but not all value drivers are equal.

There will be some businesses that bear industry-specific value drivers. In summary, there are generic and specific value drivers.

Armed with a clear understanding of value drivers, let us turn our attention to the drivers you should be cognizant of during business valuation.

Value Driver #1 Financial Metrics

A business’s financials are arguably an essential part of the valuation.

The better the quality of the financials, the cleaner those financials, the higher the value of that business because it becomes easier to get that business financed if you need to go get a loan.

Example questions to ask pertaining to these metrics include:

What is the quality of the financials like?
How clean are the financials?
Are these financials a true reflection of operations?
Does the business have debt?
Does the balance sheet add up?
Is inventory flow represented honestly?

Unclear, inconsistent, and incongruous financials drive down the value of a business.

Value Driver #2 Recurring Revenues

When companies have recurring revenue, it drives the value of a business up because there’s some consistency there. You can rely on those revenues coming in on a monthly basis.

Without consistent business, a company will soon run aground. Does the company you’re interested in have loyal customers? Regular clients? Or retainers?

These questions and the volume of monthly revenue must be known in order to ascertain just how much work you’ll need to put in to keep the business running.

The more work you will have to do to secure new clients, the lower the value of the business.

Value Driver #3 Owner Involvement Level

The risk goes way up when you take over a business that the owner was so involved in. Those types of companies tend to get a lower value.

Businesses that revolve around the owner are exceedingly difficult to take over.

It’s not uncommon to find that most small businesses were founded on the personality and strengths of the owner.

This can make operating difficult as, without the owner, the culture and essence may shift the business’ dynamics considerably.

If on the other hand, there is minimal owner involvement it makes the transition smoother and improves business valuation.

Value Driver #4 Employee Caliber

Questions to ask in order to understand the role of employees in the company include:

What’s the culture like?
The turnover rate?
Are there any employees who if they left, their absence would cripple operations?
Have the employees signed non-solicitation clauses?
How autonomous are the employees?

Having an exceptional employee base is great and can certainly reflect favorably on the value of the business, but employees should not become liabilities.

Value Driver #5 Barriers to Entry

How easy is it for others to set up shop in the industry the business you wish to purchase operates in?

Is there any technical know-how that makes it an exclusive niche?

Who are the main competitors and the industry’s dominant players?

Knowing this particular piece of information is key in evaluating the competitor’s risk.

When the barrier to entry is high, the business merits a little bit more consideration when it comes to value.

The more specific the niche, the higher the barrier to entry, the better the valuation.

Value Driver #6 Business Systems

Does the business have clearly defined business systems and processes in place?

Well-defined company practices make the transition easier and demonstrate the level of care, thought, precision, and foresight the owner has.

It should give you confidence. And consequently, the clearer the systems the higher the value of the business.

Owner and managing partner of Sun Acquisitions Domenic Rinaldi put it this way, “I always love when I see documented practices in a business. Infrastructure matters and will determine whether or not you’re decreasing or increasing value.”

Where Do We Go From Here?

These are six key value drivers you should be considering when analyzing offers and during business valuation.

If it appears intense, that’s because it is. There is a lot involved in mergers and acquisitions.

Fortunately, you don’t have to navigate the buyer/seller process alone.

At Sun Acquisitions, we’re an experienced M&A firm that can assist you in evaluating offers and further understanding value drivers. Don’t hesitate to contact us.

Sun Acquisitions Secures Six Domestic Buy-Side Mandates

March 3, 2021 by Ellen Park

Sun Acquisitions is pleased to announce six new buy-side engagements. These campaigns will be primarily focused on domestic privately held businesses. Sun Acquisitions is working with a variety of clients consisting of strategics, private investors and private equity firms.

The engagements consist of a search for companies in the following industries:

Private equity firm looking to acquire a US based alarm or fire suppression business
Partnership looking to acquire a Midwest based specialty chemicals, pharmaceuticals or plastics business
E-Commerce business looking to acquire a US based add-on
Textile manufacturer looking to acquire a screen-printing business in the Midwest or Southeast
Private investor looking to acquire a Chicago area assembly, packaging or HVAC business
Public company looking to acquire an electronics distributor

Larry Sanderman, Vice-President of Buy-Side Services at Sun Acquisitions, will be leading the search and managing these engagements to ensure the transactions are successfully completed on behalf of our clients. Engaging an intermediary in a buy-side search ensures that the campaign is clearly defined and generates proprietary deal flow with numerous qualified targets, through a streamlined process.

About Sun Acquisitions

Sun Acquisitions is a Chicago based mergers and acquisitions firm. We work with clients that are interested in the confidential sale, acquisition or valuation of privately held middle market companies. Our professionals have significant experience and knowledge to thoroughly guide clients through each stage of the sale or acquisition process. Sun Acquisitions has successfully managed and handled engagements across all industries and is recognized as a leading M&A advisory firm.

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If you are interested in buying or selling a business, contact us at (773)-243-1603 or email [email protected].

Why Larger Companies Get Larger Multiples

January 18, 2021 by Sun Acquisitions

Does the size of a company really matter where business valuation is concerned? To what extent does the size of an enterprise and its revenue affect valuation multiples?

To answer simply: Yes, size does matter in business valuation. In fact, where multiples are concerned – it matters a great deal.

One only has to study investors eyeing the public capital markets to see this at play.

Larger companies are more established and seen as less risky. This translates into more favorable valuations and subsequently higher price multiples.

For sellers preparing for mergers and acquisitions wondering why larger companies get larger multiples, this blog will give you the answers.

What are the valuation multiples?

Definition

The Corporate Finance Institute defines valuation multiples as:

“…financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable. Multiples are the proportion of one financial metric (i.e. Share Price) to another financial metric (i.e. Earnings per Share).”

This is a sound definition. To put it in our words, valuation multiples are financial benchmarks against which companies can be compared to each other.

With our current economic climate, most sellers are seeking to understand the best ways to increase their multiples so they can position themselves for successful mergers or acquisitions.

Before understanding why larger companies get the larger multiples, let’s look at some of the various types of multiples that exist.

Types of valuation multiples

There exist two major types of valuation multiples and these are:

Enterprise Value Multiples
Equity Multiples

Enterprise Value Multiples

Where M&As are being discussed, analysts rely on Enterprise Value Multiples (EVM) to assess the financial standing of a company. The four major EVMs that are used are EV/Revenue, EV/EBITDAR, EV/EBITDA, and EV/Invested Capital.

Equity Multiples

Equity multiples are most often employed by investors seeking minority shareholding in enterprises. Common equity multiples that are applied in investment decision making include P/E Ratio, Price/Book Ratio, Dividend Yield, and Price/Sales.

Post Merger – Integration Checklist

October 14, 2020 by Sun Acquisitions

Do you have a post-merger integration (PMI) plan and checklist? Who is in charge of leading the PMI team? What are the respective PMI milestones?

Post-merger integration is as much a part of the M&A life cycle as due diligence, transaction approvals, and the final contract signing. “Ideally, you would start planning as soon as you decide to buy something. If you have no plan for the target company, you are going to pay the wrong price and you are not going to be ready to handle the integration,” says M&A author Danny A. Davis in his book Danny A. Davis on Planning Merger Integrations. “I would do a couple of days planning right at the start. At the latest, I would start building a full integration plan around 100 days before you believe the deal will take place.”

The case for developing a comprehensive PMI checklist

Mergers and acquisitions are hard enough already. Failing to have an adequate PMI checklist will result in additional problems that might be dismissed as a culture clash. “The reason people come down to culture and communications is that they are used as excuses when things go wrong. Rather than admitting they’ve done something wrong or that they had a bad strategy, people talk about culture. It is more important to think and plan the integration strategy for the companies, the products, and the people,” Danny A. Davis explains in his book.

A clear-cut PMI checklist will give direction from Day 1. It will define the roles of each employee to avoid ambiguity and will provide a timeline on when the board and management can expect to have integration complete. Simply put, it is an invaluable document that should detail each of the steps to be taken to promote the seamless integration of the merging entities. Assuming that things will somehow pan out alright without such a policy is the height of folly on the part of the buyers.

Fortunately, you don’t have to look too far for a solution. As experienced business brokers who’ve brokered hundreds of mergers & acquisitions, here are our top tips on how to establish a thorough PMI checklist.

Tip #1. Delegate responsibility to a designated PMI taskforce

It is not wise for the board and management to attempt to oversee the PMI by themselves. Instead, someone with the necessary experience, expertise, and clout should be selected to manage this integral part of the transition.

Such a person and their team will make up the PMI taskforce. They will carefully study the merger and acquisition details, company cultures, and resources to draft a robust PMI strategy. Included in their plan of action should be key integration milestones, their intended form of communication with the board, and when they hope to have integration completed.

Tip #2. PMI Taskforce should establish a new hiring policy

“In any merger, the biggest challenge is always the integration of human resources because the people who are coming in have a lot of apprehensions,” says former Chairperson of the State Bank of India, Arundhati Bhattacharya.

There will be a lot of upheaval at the start. The PMI taskforce must take the bull by the horns and get ahead of the situation by designing a new hiring process. This part of the checklist must detail how the newly formed entity will onboard new hires, prepare the documentation needed for their training, stipulate salaries, and bonuses to avoid any misunderstandings.

Tip #3. PMI Taskforce to formulate an offboarding procedure

The checklist must also include a detailed outline of how redundancies are going to be addressed. It is unfortunate, but there will be casualties post-merger. Consequently, a clear-cut policy on how to deal with laying people off, moving them to other departments, or firing them is mandatory. Severance documents should be prepared ahead of time.

This will not be easy as former CEO of Hewlett-Packard Carly Fiorina observed following what was then the biggest technology sector merger in history between HP and Compaq in 2002, “A merger is hard to pull off under any circumstances. It is even harder when everyone is against you”. In the first few months of the HP and Compaq merger at least 30, 000 employees were laid off. However, the tide would turn and thousands more would be hired in the next three years.

Tip #4. PMI Taskforce to integrate an IT system blueprint

Another very important element that should be on the checklist is the assimilation process of IT systems. This assimilation must be done tactfully and with a sense of utmost urgency because operations must continue with as little disruption as possible.

IT teams will need to be briefed about their new internal organization and hierarchy. Once this is done, the IT team must get to work establishing proper security access and securing the assets of all the new hires and former employees immediately.

Businesses are most vulnerable at such a moment as evidenced by the hacking of Hong Kong-based shipbrokers Anglo-Eastern in April 2020. This incident took place when the company was moving offices. Hackers took advantage of system weaknesses to penetrate and compromise internal systems in order to demand a ransom. This isn’t an isolated case. IBM reports that the average cost of a data breach is $3.9 million. What are we saying? Cyber threats are real, so prepare accordingly.

Tip #5. PMI Taskforce to create communication and performance protocols

How will you know that integration is on track if you don’t have performance indicators? On the checklist should be the creation of clear key performance indicators. These will help teams to know what their responsibilities are and what is expected.

Also, encourage team leaders to have an open-door policy so employees can approach them for open and honest discussions. Business management coach and author of the bestseller The Five Dysfunctions of a Team, Patrick Lencioni puts it this way, “Great teams do not hold back with one another. They are unafraid to air their dirty laundry. They admit their mistakes, weaknesses, and concerns without fear of reprisal.”

You must, therefore, generate a performance review system, a communication plan, and a training and development strategy.

Looking for qualified business brokers?

Sun Acquisitions is one of the leading business brokers in Chicago. Our advisory services include strategy development, divestitures, acquisitions, consultations, and business valuation. To discuss your integration checklist don’t hesitate to reach out to us. Contact us for more information.

Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.

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