Timing and Terms Are Important Considerations
SPECIAL ADVERTISING SECTION - MERGERS & ACQUISITIONS Q&A
Is there a better point in the business cycle for a business ownership transaction to take place? That depends. Are you a buyer or a seller? If you’re buying, it may be to your benefit to move forward when interest rates are lower, borrowing terms are more favorable, or private equity financing possibilities are more plentiful.
If you’re a seller, you may be better off seeking a buyer when your company’s value is on the rise. And planning ahead and preparing for that sale as much as possible can be a smart move, if you want to get the highest valuation for your company — and, therefore, the best price. Also, it will give you time to consider whether you’d like to have an equity or management position later, as part of the new entity.
As with any complex transaction, when it comes to the structure of the deal, it’s wise to consult with the appropriate mergers and acquisitions experts to guide you through the process. Those who are experienced in M&A can point out potential problems, negotiate terms, and help you avoid surprises at closing, whether you’re a buyer or a seller.
Clark Hill — John Hensien
Q: When should a business owner engage counsel regarding a potential sale of the company?
A: Sellers should engage experienced M&A counsel early in the process, for the following reasons (among others):
• Counsel with significant experience representing buyers and sellers can identify and address due diligence concerns.
• Market surveys of deal terms are generally less useful in smaller transactions (less than $25 million) but are often applied by buyers, to the disadvantage of sellers.
• Private equity buyers have been increasingly active in local markets, resulting in complex transaction structures including equity rollovers.
• Letters of Intent often include key deal terms such as indemnification thresholds and liability limitations. While typically nonbinding, such terms are difficult to renegotiate in the purchase agreement.
Experienced M&A counsel will provide valuable insight to sellers and could very well help prevent or alleviate issues prior to closing.
Clark Hill PLC
John P. Hensien, Member
Mergers & Acquisitions, Business Transactions
Address: 500 Woodward Ave., Ste. 3500
Detroit, MI 48226
Doeren Mayhew — Claudio Calado
Q. Is M&A activity tempering in 2016?
A. M&A activity in the United States slowed during the fi rst two months of 2016 in terms of deal volume and value, compared to the same period last year. While it’s still too early to tell, the decline appears to indicate activity may, indeed, be slowing down following record-setting years in 2014 and 2015.
A number of factors can cause M&A activity to slow — including an eventual tightening of the credit markets, should the Federal Reserve surprise financial markets with either more frequent or greater incremental interest rate hikes this year. The availability of cash, held by either corporations or private equity, and access to credit at favorable terms, has supported M&A activity, benefiting M&A valuations greatly. Hence, the possibility of additional tightening in lending costs and terms may have a tempering effect for 2016.
While on a macro level the M&A market may be facing some headwinds, each business situation and transaction is different, and many factors need to be considered when determining the right time to sell, buy, raise capital, or place debt. As with other markets, however, timing M&A market cycles is critical when making those decisions.
Doeren Mayhew Capital Advisors
Investment Banking, M&A, Sell-Side,
Buy-Side & Capital Raise
Address: 305 West Big Beaver Rd., Ste. 200
Troy, MI 48084
Huron Capital Partners — Michael Beauregard
Q. I am contemplating a sale of my company and have generally run into two types of potential buyers: financial (e.g., a private equity firm) and strategic (another private or public company). What are their primary differences?
A. Strategic buyers typically expect to buy 100 percent of the company, preventing owners or managers from equity appreciation post-sale. Furthermore, they may have a team to manage the business, with no ongoing role for you or your managers. There is also the risk that the company may relocate and/or eliminate employees.
A private equity firm might be your choice if you want liquidity and some ownership for equity appreciation. A private equity buyer is also compelling if you’d like a management or adviser role, as financial buyers usually have no desire to oversee daily operations. Lastly, private equity buyers may look to partner and align with common interest through equity incentives, which can become quite valuable at a future exit.
Huron Capital Partners
Address: 500 Griswold Street, Ste. 2700, Detroit, MI 48226
Rehmann — Ryan Krause
Q. I’m considering selling my company in the next few years. How can I best prepare?
A. Consult an expert before handing over financial statements to interested buyers, to avoid losing money on the sale.
Try to project your earnings to determine your company’s value. Next, look at the actual expense structure and see if you can reduce add-backs by structuring expenses in a way that clearly shows buyers exactly what expenses will be incurred. Even a $100k add-back, with a multiplier, can increase the selling price by $700k.
Companies can and should re-evaluate and clean up their income statements before being sold, to get more money later and reduce operating expenses immediately.
CPA, Manufacturing, SEC Reporting, Pharmaceuticals, Leasing and Finance, Due Diligence for Mergers and Acquisitions
Address: 1500 W. Big Beaver, Troy, MI 48084
iMiH Group, LLC — Brendan Moore
Q: How important are human capital management and information technology in M&A?
A. Human capital management core business processes — like how employee data is entered, captured, and managed — can have signifi cant adverse effects if not done properly. Having a blueprint of how the workforce, compensation, tax and payroll liabilities, deferred savings accounts, and benefi ts are to be integrated is vital to a successful merger. Furthermore, supporting applications should be thoroughly reviewed. Often they are outdated or noncompliant, putting the organization at risk for tax and legal ramifi cations, business interruptions, and unplanned costs. Likewise, appropriate due diligence of IT assets will ensure key applications and systems are evaluated, operational, and reviewed for ease of transferring ownership or relicensing.
Please contact us for a free consultation.
iMiH Group, LLC
Brendan Moore, Senior Partner
Business Advisory and Consulting Services for Human Capital Management and Information Technology
Address: P.O. Box 7088, Novi, MI 48376
Professional Affiliations: Association for Corporate Growth – Sponsor, Turnaround Management Association, American Payroll Association, Detroit Regional Chamber, The M&A Advisor
P&M Corporate Finance — Joe Wagner
Q. Is there runway in this cycle to complete a sale transaction? If so, what steps should be taken?
A. Yes. We expect the current cycle to continue for the next 18 months. This means launching a sale process in the next 12 months to benefit from a seller-friendly deal environment — favorable interest rates and lending terms, and significant availability of equity capital. Also, while a bit counterintuitive, a key to optimizing value is to leave the buyer with some runway; you don’t want to sell at the peak.
If you’ve decided to sell in this cycle, you should take the following steps:
• Know what your business is worth to a willing buyer and how that translates to equity value.
• Compare that resulting value to personal wealth objectives.
• Identify value levers and risks of the business.
• Know mitigation strategies for identified risks.
• Build a demonstrable and supportable growth plan.
P&M Corporate Finance, LLC
Director, Investment Banking-Mergers & Acquisitions
Address: Two Towne Square, Ste. 425
Southfield, MI 48076
Williams, Williams, Rattner & Plunkett — Robert S. Bick
Q: I’m thinking of selling my business and want to limit obligations to the buyer after the closing. Can my Asset Purchase Agreement (APA) include language to protect me?
A: Yes. APAs typically contain sections in which the seller makes “representations and warranties” and agrees to “indemnify” the buyer from “losses.” Sellers can add clauses to APAs that limit their obligations, including:
• Inserting “knowledge” and “materiality” qualifiers.
• Limiting the buyer’s indemnity rights by using “baskets,” “caps,” and “survival periods.”
• Limiting the buyer’s indemnity rights to certain types of “losses.” Engaging experienced M&A legal counsel can help a seller limit post-closing obligations.
Williams, Williams, Rattner & Plunkett, PC
Robert S. Bick
Corporate Law and Mergers & Acquisitions Law, ACG Detroit M&A All Star Attorney of the Year
Address: 380 North Old Woodward Ave.
Ste. 300, Birmingham, MI 48009