M&A discipline

The M&A market remained active in 2015. The year proved conducive for deal-making, thanks to low interest rates, inexpensive debt, and an abundance of usable cash on corporate balance sheets. In fact, there were 2,150 completed transactions involving private companies throughout North America, for a total deal value of US$442 billion. Real estate and technology were the most active sectors, representing 32 percentof total transactions.

M&A has remained central to the strategies of both buyers and sellers of businesses. For buyers, low rates of economic expansion in Canada have been bolstered by a growing US economy. Yet private company owners and investors still see acquisitions as key to achieving their overall growth plans.

For those looking to sell all or part of a business, the landscape looks promising. Vast amounts of cash on many corporate balance sheets and the sustained growth and diversity of private equity market participants mean owners of high quality businesses may be able to reap the benefits of a seller’s market, where such businesses remain in short supply.

M&A remains central to the strategies of both buyers and sellers of businesses

Issues
While there are many serial acquirers in the public market, private companies are generally less experienced, and armed with fewer resources, to take on such transformational opportunities. Further, the complexities of structuring and financing such deals, and then integrating an acquired business, are not within many private organizations’ skills sets. Then there’s the added pressure of needing to run an existing business in a highly competitive market.

Those who wish to sell all or part of their company are similarly challenged, as they generally have limited experience in being able to describe the value proposition of their company, especially in terms a sophisticated investor would appreciate. Meanwhile, the tendency to limit the allocation of key responsibilities to a well-staffed senior management team, and to limit spending on key technologies and reporting systems, further complicates value maximization in a sales process.

A final concern for everyone revolves around simply knowing who to trust. As Doug McDonald, the M&A Advisory partner for Deloitte Private, says, “Knowing the buyers, what they look for and how they behave pre- and post-acquisition, is as critical as finding them in the first place.” There is no more frustrating experience for a transitioning shareholder than having a deal blow up after months of work, based solely on gaps in expectations.

The keys, therefore, to a successful acquisition program include detailed market research to identify targets, development of rigid and specific acquisition criteria, the creation of a funnel of opportunities, relentless follow-up and the creation of a value proposition in terms beyond just money.

Success depends on developing a unique, powerful value proposition.

Opportunities
Family-owned and other privately controlled companies can take steps to increase the probability of success in the M&A market. These include conducting regular market scans to determine macro trends and the response of competitors, coupled with ongoing development and monitoring of a deal funnel. Treating these as strategic imperatives, as well as maintaining relationships with key advisors and intermediaries, will improve potential deal flow and keep the discussion on the executive agenda.

As well, adding internal or external resources with the capacity and sophistication to move quickly when a deal presents itself will provide the greatest assurance of success in competitive processes. And perhaps most fundamental is the need to maintain focus and do the research. If a target doesn’t meet a company’s criteria, it should move on.

It's a private-company seller's market. Quality companies, in short supply at the best of times, are even scarcer now. And capital availability is at an all-time high.

However, success depends on developing a unique, powerful value proposition. Once developed, meeting the right private equity firms can help a company test it in a confidential manner, without exposing the company to the market.
Then, once the company can describe its value proposition as an investor would best appreciate it, the seller should consider a formal process to gain liquidity. Here, looking to trusted advisors for assistance is critical. After all, running a successful M&A process is their competency; an owner's is running the business.