Charles River CFO works with a number of their clients to ready them for a merger or acquisition. Sometimes our outsourced CFO and accounting services is brought in to specifically assist the client to get ready for this transaction, other times, as their long term fractional CFO we have been positioning them for such an exit. For many of our clients, M&A can be lucrative for owners and investors. Whether it is part of an exit/payout or just another part of your growth strategy, it’s important to be strategic (to leverage both value and growth).
It is healthy to take an active look at M&A even if you choose not to pursue it. Some of the “exercise” of considering M&A can produce healthy changes in your organization.
There are a few key steps to prepare for such a transaction. Then comes the evaluation.
So let’s talk about preparation. Here are a few take-always from helping our clients prepare for this transaction. Keys are: 1) your financials 2) your internal risk assessment 3) defining your business 4) your readiness to be acquired and 5) market readiness/cycle.
In addition to having at least three years (preferred) of financials that are GAAP or GAAP-lite, review your accounts and clean up any questionable areas. How strong are your receivables and its reserves? Any judgement based accruals need to be scrubbed? Any convertible or off balance sheet debt?
Segregate recurring revenue from one-off revenue. Same for their associated expenses. This exercise is a general pass at the quality of your earnings. What can your acquirer count on? Can you tell a story that supports growth? Can that growth be extended forward into future years?
Be sure to footnote or to explain major transactions and have the ability to pull them out of your financials should you want or need to.
Your internal risk assessment
Diagnose your business’ strengths and weaknesses. Don’t think your potential acquirer hasn’t already done this. Your upfront assessment puts you in front of the conversation. Knowing your “skeletons” and addressing them demonstrates your understanding of the business. What are your hidden gems? Define your uniqueness and explain them.
As a business you have areas of exposure both by definition, due to the business you are in, and by how you designed your infrastructure.
Your exposure by definition of the business you are in should be known by your acquirer. By identifying this business risk, you demonstrate your understanding of the business you are in. For example, could your business be susceptible to obsolescence, requiring constant innovation? How have you addressed or mitigated this business risk?
Now address the risk from how you have designed your business. Is your business lean and relies on key individuals? Have you spread your risk by diversification? Capture this information. Many companies have evolved in their business design and are often startled when they look at the risk they have designed into their business model. Maybe you focused on research and development or marketing and allowed your back office infrastructure to lag. Don’t be caught flat footed. If you know your weaknesses, you might have time to redesign and explain these changes in a proactive fashion. Know them versus being caught unaware during due diligence.
Defining your business
Think of this as your “management’s discussion and analysis” (MD&A.) While we all wish to believe we are that unicorn, your business twin is out there. Take the information you pulled together from your analysis of your financials and your internal risk and write it up. Do your research and find your twin in the public market. Know what you are up against. The information disclosed by your twin is probably what your acquirer will want to know at a minimum.
Be ahead of your potential acquirer’s request. By writing up your own business description, you define the conversation. This is the time to capture and disclose any one-off costs. If there are any unique compensation models, get those details out there. Allow the acquirer to easily create the EBITDA bridge and carve out savings from acquisition. And don’t forget to highlight your hidden gems.
Your readiness to be acquired
Is your company ready? As a business, what does an analysis of product sales look like? What does the top line revenue look like and does your 5 years’ growth projections align with this? Where are you versus your market spaces penetration?
Is your business in a position of perceived strength or weakness? Even a weakness may have key value to another company (for example immature market penetration prior to acquisition might partner well with existing market penetration by the acquirer.). Have you achieved key business milestones? Will a deal facilitate achieving key milestones?
Is your company psychologically ready for the deal? And does it matter? Will the company be stronger after an acquisition? It might be necessary to communicate the benefits of an acquisition or merger. Top talent will always have choices, the right message will keep them.
Is the market ready?
If you are strong, the market is always ready. But if your business can fluctuate with the economy, consider being ready while the economy is still growing.
Think about who is your ideal acquirer. Pull the list together by general industry and specific firms. Identify the pros and cons of both players by market and by individual firms.
Know what comparable deals look like, both by size and industry. What are the pros and cons of various business partners? Understand the multiple ranges. Draft your ideal transaction and then give that deal a haircut.
If you are sitting in a position of perceived weakness understand the potential impact. Can you make lemonade out of the deal? Is the sum of the deal less than the parts? Does your business have valuable segments that might be worth more carved out and the remainder company be sold at a discounted value? Look at what the market has done in both these instances.
Ready for marriage?
Firms often find it hard to get through M&A preparation. Charles River CFO has worked with numerous companies helping them get ready for a transaction. The better prepared your company is, the easier it is to decide if the deal is right for you. Do you care who you are marrying? It is important if key professionals will have an ongoing role in the acquired firm. It could be important if earn-out or other contingent fees are tied to the transaction. As a fractional CFO augmenting your team, we can help you determine fit of product or market. Some deals require a level of reverse due diligence, is the acquiring firm healthy, good corporate culture fit, and market alignment. Charles River CFO can help you sort through the deal.