By: Joe Hunt
“M&A transactions are fraught with peril and unexpected surprises for inexperienced business owners and corporate officers; the goal of today’s panel is to demystify the process,” so said Mary Beth Kerrigan, a Partner in Morse’s Corporate Practice Group, moderating a panel on M&A Transaction Readiness at the Firm’s 2019 VC and M&A Forum.
Kicking off the panel with a discussion surrounding the right time to sell a company, Jere Doyle, Managing Director at Oyster Funds and Sigma Prime Ventures and a serial entrepreneur remarked that, “you start companies for liquidity events; always be ready for a transaction.” When pressed further, Doyle emphasized the importance of “consistency” in a corporate setting. “You have to be consistent; approach the operation of your company in the exact same manner that you would a transaction. That means keeping your financial house in order, hitting your targets, and embracing your company culture.”
These sentiments were echoed by Emily Green, a former Chief Executive Officer and current Independent Board Director and Advisor to newly minted CEOs. According to Green, “it’s incredibly important to show potential investors and buyers that you know your business and your industry inside and out.” One of the biggest challenges to any CEO entering into the M&A process is having the bandwidth to control the deal process without forgetting the importance of running the business simultaneously. “Anyone who thinks they’re going to do this on their own quickly realizes that it just isn’t possible.” To Green, a successful deal begins with engaging the board of directors from day one. “As a current board member it simply wouldn’t fly if a CEO ‘dropped in’ far along in the process to inform the board that he or she is selling the company. A good board can really add value in the deal process but only if they are actively involved.”
To Gregory Rush, Partner with Dunn Rush & Co, LLC, “all business owners leave their companies in one of two ways: either on their own terms or on somebody else’s.” To maximize the chances of a successful exit, Rush advises clients to start thinking about the M&A deal process early. “You’ve really got to think ahead here when it comes to getting your company ready for a sale. Things that sophisticated buyers want to see, like reviewed or audited financial statements, quality of earnings reports, and five-year forecasts, take time to develop. Time kills deals – time to track down and fix issues in the heat of the moment is an inefficient use of time. You can’t just drop all that into a data room without planning ahead.” According to Rush, companies don’t have to go it alone. “You don’t just go out and decide to sell your company one day, or at least you shouldn’t. Hiring an investment banker can really deliver accretive value because bankers help buy and sell companies all the time. They know the market and they know the players. Yes, hiring an investment banker can be expensive, but it’s always going to be expensive if you hire the wrong professional.”
Despite the diversity of experience and opinion, the panel was united on the biggest concern any company should have about the deal process: “It’s the people.” “It starts with the culture of your company,” said Doyle, “then you look to the culture of the buyer. If the culture isn’t aligned you’re going to have problems.” Rush echoed this sentiment, “Taking care of your team – both the management folks in your small tent driving the deal as well as the rank and file employees who built the company and made it valuable – is paramount.” Sometimes though not everyone is going to survive the transaction; “realizing synergies” through “headcount reduction” is an unfortunate yet common result of M&A transactions. Green’s advice as a former CEO who has been through M&A transactions before is clear: “If you’re going to lose people, rip the bandage off and do it all at once; downsizing departments and eliminating employees over time can result in corporate culture death by a thousand papercuts. Take care of those valued team members now so you can enthusiastically lead your remaining team into the future.”
Following the moderated remarks, the panel participated in a lively round of Q&A from the audience. The audience posed questions regarding potential deal killers, the “small tent v. big tent” approach that Green and Doyle put forth, and if/when a company should consider an earn-out structure. Regarding the latter, Kerrigan noted that earn-outs frequently do not work, “where we are representing a seller facing an earn-out, we take every precaution to try to protect the post-transaction environment to allow the seller to achieve their earn-out objectives. The problem though, is when you sell your company and hand over the keys, you’re going to lose the ability to control your company’s destiny.” As Doyle succinctly put it, “if you need an earn-out to make the deal make sense, don’t do it.”
Stay tuned for our next panel recap: M&A Market Update.