Is There More Than One Buyer For My Business?

I have come across several niche businesses lately where they have received unsolicited interests from potential buyers and this leaves the owners wondering, are there any other buyers for my business?  Should I bother with hiring an agent and engaging in a process that could take many months to complete or take the bird in the hand?

If these companies were publicly traded there would be no question.  The board of directors of a public company would undoubtedly reject the first unsolicited offer and engage an investment bank to explore alternatives.  Assuming normal operating circumstances, a board would not fulfill its fiduciary duty if it accepted the first bid.  Due process would require at least an independent fairness opinion, but even this would not assure the shareholders that they will realize the highest share price in a transaction; only a thorough and diligent auction process can do that.

Back to the question at hand; could there be other buyers?  When a potential seller operates in a very specialized vertical with only several competitors - that may spread unfounded rumours of the company’s demise as soon as they hear of a possible transaction - it is tempting to go with the bird in the hand.  But, as I have noted several times, the best buyer is not likely to be a direct competitor.

The best buyer is likely to be a “platform buyer”.  A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology.  As an example, we were engaged to sell a pattern recognition technology company in the field of product quality control.  This technology would scan a production line and “kick-out” products that did not meet certain criteria.  In this case, the ultimate buyer was the US defence department, who paid a strong premium for the business and then used the technology for facial recognition for national security purposes.  Who would have predicted that? ... but having approached large technology companies that also served defence contractors ultimately led to this outcome.

The point is, even if you feel that there are only one or two competitors that could potentially be interested in acquiring your company, we can likely find additional buyers that you have never thought of as per the example above.  It is extremely rare that we have not been able to source at least several expressions of interest for a company for sale.  In the end you only need two interested parties to create that competitive tension.

So what is a company to do?  Private companies, where owner-entrepreneurs own majority control can do as they please.  This is the luxury of owning a private company.  Company owners may not want the hassle of preparing a business for sale or they may feel the value being discussed is fair but, in the end, going to market with an experienced advisor is the only way to secure the best price for your company.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Why is Instagram Worth 1 Billion?

There are many reasons why Facebook would pay a lot of money for Instagram.  Reasons such as: to improve its mobile revenues (of which it had none), to eat Twitter’s lunch, to eliminate a potential future competitor, and basically to maintain its growth and market value momentum.  Remember, Facebook is the internet's largest photo sharing site and it knows the power of photos very well but what I really want to tackle here is why 1 billion as opposed $500 million?

The simple answer is it was a privately negotiated transaction and Instagram had just recently raised money from Sequoia Capital at a reported $500 million valuation, so they weren’t going to sell for less.  Well done to get to 1 billion.  This means that Sequoia Capital and other firms that contributed money were essentially able to double their money in a very short timeframe.

Prior financing round valuations and existing investors’ requirements are value pegs but here is some theory around what price is possible.  In cases like this companies are paying a scarcity premium.  The argument being that, either by way of market position (i.e. if all your friends are on Facebook there is no point being on Orkut) or by way of proprietary technology, these targets have something the acquirer can only attain by buying them.

At this point a buyer is paying a price beyond the notional value of the target and encroaching on the value to the buyer.  The notional value is a company’s value independent of the potential strategic benefits to a particular buyer.  The value to the buyer is that amount of value the acquirer can produce with the target.  Not something they typically pay for unless forced to in a competitive situation.

To consider this by way of a generic example, let’s assume a billion dollar revenue company is paying 10 times revenue for an early stage company generating $1 million in revenues.  The target company’s technology will allow the billion dollar revenue company to increase its market share by 10%; a value of $100 million in revenues.  You can understand why the acquirer might pay $10 million for this company.

The conclusion is that a buyer paying a price below the value to the buyer is something that makes economic sense, even though the price may sound astronomical…. and if you are being approached by Facebook (estimated value of $100 billion) then there is a lot of room to pay a lot of money.  In my next post I will examine what Facebook could have paid.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

VTI Profit Margins Underwhelm

In the Spring issue of the Veracap Technology Quarterly we took a closer look at technology sector profitability.  While valuations have improved substantially, many mid-market technology companies still struggle with profitability.

On average only 55% of the technology companies included in the Veracap Technology Index (the “VTI” includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million) were EBITDA positive and, of those companies, the average margin was 12.1%.  The subsector with the most profitable companies was the IT Consulting & Services sector and the sector generating the highest margins was the Internet Software & Services sector with an average EBITDA margin of 15.3%.   In looking for an explanation of these results we believe the answer lies in the average size of the companies.  The average market cap of the VTI is only $81 million.  Of the companies not generating a positive EBITDA, 84% had a market cap of less than $100 million.  Canadian technology companies go public at a relatively small size and need to grow larger to achieve scale and improve efficiency.

The most profitable companies in the VTI were Mediagrif Interactive Technologies with an EBITDA margin of 33.6%, Enghouse Systems with an EBITDA margin of 27.2% and C-Com Satellite Systems with an EBITDA margin of 23.9%.  While nowhere near world leaders like Google and Microsoft which have generated EBITDA margins in the 40% range for years, these are nevertheless our strongest performers in the quarter. 

So do high margins translate to the best valued companies in the VTI?  In general yes, the above noted companies are in the top quartile in terms of an EBITDA multiple but there are exceptions as well such as C-Com Satellite Systems which ranks 3^rd in profitability but was valued at less than four times LTM EBITDA.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Tech Companies Explode Out of the Gate in 2012

The Veracap Technology Index (“VTI”) composite share price has been on a tear since December 2011.  The VTI has more than quadrupled the S&P/TSX Composite Index, with a return 20.8% versus 5.0% for the period from December 1, 2011 to March 1, 2012 (and this excludes the stellar premiums awarded such take-over targets as Gennum and RuggedCom).  

To refresh our readers on the VTI, it includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million (Veracap’s area of focus).  As at March 1, 2012 this included 79 companies and of these 53 were up an average of 38%.

Technology sector valuation multiples have also increased sharply from 7.4 on December 1, 2011 to 9.8 on March 1. 2012.  The strongest subsector, in terms of valuation multiples, was the Software sector where companies such as Nightingale Informatix,  Redknee Solutions, and Posera-HDX contributed to an average last twelve month (LTM) EBITDA multiple of 13.2.   The Hardware & Equipment subsector brought up the rear with companies such as COM DEV International Ltd., Smart Technologies Inc. and LOREX Technology Inc. trading below five times LTM EBITDA.

Technology sector lifters and drags for the period from December 1 to March 1 include:

Lifters                                                 Subsector                                             %

Aastra Technologies Ltd.                    Communication Technology              Up 44.7%

Glentel Inc.                                          Communication Technology              Up 40.0%

Enghouse Systems Ltd.                     Software                                             Up 39.9%

Drags                                                  Subsector                                             %

Smart Technologies Inc.                     Hardware & Equipment                     Down 29.0%

Sandvine Corporation                         Communication Technology              Down 12.0%

DragonWave Inc.                                Communication Technology              Down 5.9%

Note: for companies with a December 1 share price greater than $1.00

For more M&A information on the Canadian technology scene please see our Spring issue of the Veracap Technology Quarterly.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Has it Been Three Years Already?

In my last post I noted that now is a good time to pursue a divestiture or private equity transaction based on: (i) coming out of the recession in 2009 and seeing a general return to growth and profitability, (ii) historically low interest rates, and (iii), a tremendous amount of investible capital at private equity funds and on corporate balance sheets.  So how good is it?

The following is a chart of the S&P500 over the last three years. Since March of 2009, after reaching a low in the 675 area, the S&P500 is now 100% higher and flirting with recent highs.

The 10 year US Treasury yield index is below 20 (at a three year low resulting in a yield of 1.87%).

The facts are as follows: we are near a three year high in the S&P500; S&P500 earnings have improved every quarter since Q1 of 2010, interest rates are at three year lows and a recent study by the Wall Street Journal highlighted that "cash accounted for 7.1% of all company assets, the highest level since 1963."  In short a strong foundation for a healthy M&A market.

BUT, people are worried.  Worried about the European debt crises, US budget deficits, an ineffectual Congress, falling house prices and an unemployment rate of over 8%; hence the contradiction of improving earnings and historically low interest rates.  The expression “the market is climbing a wall of worry” reflects a scenario where the market goes up despite uncertainties.  This is positive in my mind because it represents a healthy tension between the bulls and the bears; no over exuberance with the potential of a crash but steady as she goes. According to Standard & Poor’s, the current consensus 2012 earnings forecast for the S&P500 is $103.70 which, at current levels, equates to a multiple of 13 times. Quite reasonable and therefore we are in a positive environment for M&A activity.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

The Window is Open

I noted in my last post that private company divestitures or equity financings can take between seven to nine months to complete (a financing can be quicker depending on the structure).  This may seem fast or slow depending on your perspective but that timeframe is typically not the whole story. 

Veracap's Value Enhancement Framework^TM (see “How Does an M&A Advisor Add Value to the Divesture Process?”) notes that an important part of the process is the planning stage.  For example, while preparing for sale it is critical that personal goodwill be transferred to intangible, company goodwill.  What this means is that owner-entrepreneur responsibilities and relationships are migrated to a management team that will stay with the business for an extended period of time.  The planning process may take several years to complete.

The next phase that can take years to complete is the transition phase.  Unless the owner-entrepreneur is no longer active in the business, the buyer will likely seek a period after the closing where the seller remains engaged to ensure a smooth transition and delivers on earn-outs, etc.

The planning and transition phases can add a number of years to the process, but here is the real kicker, investor sentiment and the economy.  In fact, a great opportunity to sell or raise equity at a premium may come along only once in a lifetime.  We all remember the internet bubble of 2000 and the more recent US real estate bubble in 2008.  If you assembled a good tech team and had a web related idea in 1999 or early 2000, you could fund a start-up at a significant valuation (I personally had an idea that was funded at a multi-million dollar value). 

The internet bubble crashed in 2000 and the US real estate bubble crashed in 2008 taking the whole world with it.  When a recession hits and profits are diminished, demand drops off and values naturally become depressed.  You could arguably sell your business in the 2009/10 timeframe but not at 2007 valuations.  As an owner-entrepreneur, when you thought your business was worth $20 million but you are told it is now worth $12 million, you are going to think twice about going to market.

We have seen many businesses return to strong profitability in 2010 and 2011 (depending on their fiscal year end) and with a number of years of sales and margin growth, strong valuations can yet again be achieved.  While bubbles are extremes there are always hot and cold sectors from time to time where strong valuations are realizable.  Some current examples of hot sectors include cloud based virtualization such as Software as a Service (SaaS) and Platform as a Service (PaaS), social media, mobile marketing, penny auction and deal-of-the-day web sites.  A once hot but now cold sector, ironically, is the solar sector.

We cannot predict when the next recession will begin.  The finance community refers to IPO windows; when they are open an IPO is possible, when they are closed it is not.  The process of preparing and positioning to sell your business, or equity in your business, can take many years and an economic downturn can add several more years to that.  As for right now, based on: (i) coming out of the recession in 2009 and seeing a general return to growth and profitability, and (ii) historically low interest rates, plus a tremendous amount of investible capital at private equity funds and on corporate balance sheets, I would say the window is open.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Milestones in the M&A Process: How Long Does it Take?

Milestones in the divestiture or private capital raising process are similar and generally as follows:

Milestone	Timeframe
Preparation of the marketing materials (by the advisor in concert with the seller) and due diligence materials (by the seller).	The documentation including a teaser, CIM and buyer list, while iterative with the seller, can be completed within four weeks. Preparation of the due diligence materials is highly company dependent and can take from several weeks to several months.
Engaging potential buyers and securing expressions of interest.	Potentially to many parties; up to 2 months.
Management meetings and supplemental information provisioning; securing and negotiating the final LOI.	With the top 3 to 5 parties; up to 2 months.
Due Diligence and drafting/negotiating the purchase and sale agreement.	With the final party; 45 to 60 days.
Total	7 to 9 months

Having said that, the following is an actual example of a divestiture of a private company.  In this case, the owner and 100% shareholder wanted to retire and was well prepared to initiate the process.  The business was a very profitable software business operating out of one location servicing a diversified customer base.  In short, an attractive acquisition opportunity supported by a motivated seller.

The engagement letter to commence the process was signed May 11^th, a Wednesday.  That Friday we met with the company for an information gathering and strategy session.  One week later we met again, this time having completed a first draft of a potential buyer list, a Confidential Information Memorandum (CIM) and the teaser.  First emails and calls to potential buyers commenced on may 26^th; first books (CIMs) were sent on June 10^th; and expressions of Interest (EOIs) were requested by June 30^th. 

Getting a sense of market interest and indicative value can be a fast process; in this case about seven weeks.  Key contributors to a speedy process are client readiness and working as expeditiously as possible on the factors that the selling team can control.  While only half-way through the process (with management presentations, requesting and negotiating LOIs and due diligence yet to come), the selling team will have a good sense of the market interest and whether a good deal is possible at this point in the process.

Many things, both economic and company specific, can change during the selling timeframe and it is strongly in the seller’s and advisor’s interest to complete the process as quickly as possible.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Veracap Launches Mid-Market Technology Index

While there is an S&P/TSX Information Technology Sector index, it consists of just six companies and five of those have a market cap greater than a billion dollars.  Due to the small number of companies included, it is susceptible to company specific risk influences.  As an example, the S&P/TSX Information Technology sector index was down 18.5% January to November 25^th largely due to RIM falling over 70% during this period.

The Veracap Technology Index (the “VTI”) includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million.  As at November 25, this included 75 companies.

There are 179 technology companies listed on the TSX and TSX-V, further segmented in the following subsector classifications: Hardware & Equipment, Internet Software & Services, Communication Technology, Software, and IT Consulting & Services.  As at November 25^th, 88 listed companies had a market cap of less than $10 million and the average market cap in the VTI is $70 million.

We feel the VTI is a better representation of Canada’s vibrant mid-market technology sector.  The VTI composite share price outperformed both the S&P/TSX Composite Index and the S&P/TSX IT sector index since the beginning of 2011 with a year to date return of -8.4% versus -14.7% and -18.5% respectively.  Technology sector valuation multiples crossed the S&P/TSX Composite index in mid August as the latter was dragged down by falling commodity prices. 

Since the beginning of 2011 VTI companies have been trading at an average valuation of around 9.0 times LTM EBITDA.  The strongest subsector, in terms of valuation multiples, was the Software sector where companies such as Guestlogix, Redknee Solutions and March Networks contributed to an average LTM EBITDA multiple of 12.9. The Communications Technology subsector brought up the rear with companies such as Aastra Technologies, Sangoma Technologies, and C-Com Satellite Systems trading below four times LTM EBITDA.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

2011 Year-End Summary

I started this blog in August and it feels like we have already addressed some meaty topics.  Here is what I have covered so far.

M&A Acronyms

Terms like LTM, NDA, EOI, CIM, PSA and VTB explained.

How Much Information (and when) Do I Share With Potential Buyers?

There are four phases of progressive information release to smaller and smaller audiences in the acquisition/divestiture process.

Constructing a Buyer List

M&A advisors will use many resources to prepare a buyer list including proprietary in-house databases, existing relationships in industry and the private equity and fund sectors, business networks, associations, and commercial company databases.

What Makes a Good Buyer?

To state the obvious… companies with ability to pay and an interest in paying a premium.

Finding a Buyer: It is Rarely the One You Expect

Once you have started the process you can’t wait for the company that you thought would be your buyer to be ready. 

Attracting Foreign Buyers: The Benefits of M&A International

Canada has many leading specialised mid-sized technology companies that have emerged here and for them to realise full value in a strategic auction process they must access international buyers.

What Will a Strategic Buyer Pay?

A strategic buyer will pay somewhere between the notional value and the value to the buyer.  Creating a competitive bidding environment can persuade the winning buyer to pay more than the notional value and share some of the value to the buyer with the seller.

What Will a Financial Buyer Pay?

Private equity will act like strategic buyer when it comes to portfolio add-on opportunities.

Normalization Adjustments for Private Companies

Normalization adjustments are a delicate matter; too many and it raises a red flag, too few and you leave money on the table.

The Basic Math of Valuations – Why Mid-Market Companies Are Valued Lower Than Their Public Company Peers?

The risk-return curve is the most fundamental principle of corporate finance. 

How Do I Attract a High Multiple for My Business: The Business Factors

The biggest driver in attaining a higher multiple is a company’s profitable growth prospects, and, this should already be evidenced by a historical growth record.

How Do I Attract a High Multiple for My Business: The Sale Process

The ideal time to sell is when there are positive trends in revenue and earnings with the expectation of more to come.

Why is a Tech Company Worth Three Times Revenue?

There are two items of note in the title: (i) the valuation metric; a multiple of revenues and (ii), the notion that technology companies as a group are different from other companies.

How Does an M&A Advisor Add Value to the Divesture Process?

Veracap's Value Enhancement Framework^TM follows well defined planning and execution strategies in undertaking the sale of a company.

How Does an M&A Advisor Add Value to the Divesture Process: the Intangibles

An M&A advisor allows the principals and management to stay focused on the business and can wear the black hat as well as eat humble pie.

When is an MBO a Good Idea?

An MBO can be a good option if the buying management team is strong and interested in partnering with an institutional backer that can bring cash to the transaction.

Specialised Funds for Unique Needs

The Shotgun Fund^® will purchase common shares from departing shareholders when a shotgun clause or buy-sell agreement has been executed and the Succession Fund™ purchases shares from shareholders that are looking for liquidity and want to take "Chips off the Table".

Happy Holidays and if you have any thoughts for a topic in 2012, please let me know.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Specialized Funds for Unique Needs

I have noted before that there are over 40,000 private equity funds in North America ranging from individuals to multi-billion dollar funds such as Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson, General Catalyst Partners, and Sequoia Capital. 

If you have a business that is generating about $1 million in EBITDA or greater, then there is a good chance there is a fund out there that may have an interest, and probably investments, in your space, resulting in the possibility of a good transaction.  Even companies at break-even or in a loss position can find interest from the private equity sector, however, in these cases they are likely to be opportunistic or vulture funds which sometimes results in the sector being painted with a broad brush.  In general, private equity is smart money that can bring more than dollars to the table and, as such, can be a good partner for the right company.

The most ad-hoc type of fund is a special purpose acquisition fund, where accomplished individuals are able to secure backing, typically from high net worth individuals, in the $5 million to $20 million range to acquire a single company.  This is a financial buyer in the purest sense as there are no synergies to be realised, however, usually a board of directors is formed by well heeled and well connected partners who can then help with business strategy, customer leads and further acquisition financing.

Beyond this one-off type of fund there are established venture capital and private equity funds.  In my experience venture capital investors typically take a substantial minority equity position and look for investments that can return 5x to 10x (i.e. if they invest $1 million, they target a realization of $5M to $10M in a sale or IPO exit).  VCs don’t look to achieve their goals by acquiring additional companies in the space but rather by betting on, and working with, the expected winner in the space.  Private equity on the other hand, quite often seeks 100% ownership and will then continue to look for add-on or tuck-in acquisitions to grow and increase the market power of its investments.  Private equity comes in many varieties including Leveraged Buy-Out (LBO), Growth Capital, Distressed and Mezzanine Funds.  It is not unusual, given that these funds often have a finite period within which to raise money, invest it, and return it to investors, that one fund’s exit is another’s entry. 

An example of a unique equity group is Argosy Partners.  Argosy Partners manages the Shotgun Fund^® and the Succession Fund^TM.  The Shotgun Fund^® will purchase common shares from departing shareholders when a shotgun clause or buy-sell agreement has been executed (i.e. your business partner offers you $5 million for your half of the business and you have 30 days to decide whether to sell to him or to buy him out).  Because of the time constraints in such circumstances, The Shotgun Fund asserts it can close a transaction in less than 5 days of first making contact.

The Succession Fund™ purchases shares from shareholders that are looking for liquidity and want to take "Chips off the Table".  The Succession Fund typically partners with continuing owner-managers who do not want to put their business up for sale prematurely, and who are reluctant to use significant leverage to accomplish their shareholder realignment objectives. 

If your view of private equity is that they will only buy companies at a discount, it may be time to take another look.  Private equity can be a good option for entrepreneurs looking for a variety of value enhancement or exit options.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

When is an MBO a Good Idea?

MBO stands for Management Buy-Out and describes one alternative for an owner-entrepreneur to exit his or her business.  Management can range from an experienced arm’s length team to family members who are active in the business.

The advantages of an MBO include:

• Low Transition Risk

The buying managers know how to run the business.  Management continuity is usually a big issue in the sale of a business and keeping management in place adds tremendously to the finance-ability of the transaction.

• Minimum Disruption

Putting a business up for sale creates a period of uncertainty that direct competitors can capitalize on.  While this threat is often overestimated, this rational will influence certain entrepreneurs to choose this path.

The drawbacks of an MBO include:

• Suboptimal Price

An auction process among strategic buyers that have the most to gain from the acquisition will most often realize the highest price.  One cannot predict what price a strategic buyer might pay. See: “What Will a Strategic Buyer Pay?”. 

In some cases management and the seller negotiate a fair and do-able price and in other cases an independent valuation is performed but in either case it is not likely to be equal to what a strategic buyer might pay.

• Suboptimal Structure

Unless there has been a plan in place for years, buying managers typically don’t have sufficient cash on hand to buy the business.  As a result, in most MBOs you will see vendor notes where the seller finances part of the purchase price for the buyer.

However, there is one big exception to the drawbacks and that is if the management team can attract the attention of a financial buyer.  I noted in “What Will a Financial Buyer Pay?”, that a financial buyer will pay like a strategic buyer when it is considering portfolio add-ons.  A strong management team that aligns itself with private equity that has other investments in the space can be a very strong buyer.  Now the question becomes: does the management team want to partner with an institutional investor and pay that much?

The decision to sell to management is one that should be addressed early and definitively.  Management should not be included in the auction process.  This creates a conflict of interest where management is incented to act in its self interest.  There are also expectations to manage.  If management is keen to buy the business but cannot come to terms with the seller, or cannot secure the financing, then they may be seriously demotivated and not work in the best interest of the auction process.

An MBO can be a good option if the buying management team is strong and is interested in partnering with an institutional backer that can bring cash to the transaction.  If the MBO is pursued simply because other options are not of interest then the seller must be satisfied with potentially accepting a lower value proposition.

 

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

How Does an M&A Advisor Add Value to the Divesture Process: the Intangibles

My last post was about whether an M&A advisor is worth the cost of managing the divestiture process and how he or she goes about realizing the highest value for his/her clients.  In this post I want to comment on the non-price issues that could arise and how an M&A advisor can keep the process running smoothly and ensure the post sale relationships are started on the right foot.

The following are three areas where an advisor improves the chances of a successful transaction:

·         Allows the business owner to concentrate on running the business

I noted in “How Do I Attract a High Multiple for My Business: The Sale Process” that the selling process is one that takes seven to ten months to complete and that performing below expectations during this time could lead to serious delays and potential difficult renegotiation.  Creating the offering materials and contacting/informing suitable buyers alone is a full time job for the first several months.  Working with an advisor allows the principals and management to stay focused on the business and its performance throughout the process – the process can be long and distracting but the business should remain priority one.

·         Shows serious intent to complete a reasonable transaction

Retaining an advisor demonstrates serious intent of the vendor, ensures objective expectations have been set during the planning phase and makes buyers aware that they will be participating in a competitive and professional process; something which can be leveraged during negotiations.   The sale process is often an emotional one and having an objective advisor can provide independent advise and direction which otherwise might not be possible.

·         Creates a buffer during negotiations to ensure positive post-transaction relationships

Another role advisors play is wearing the ‘black hat’ during the process.  Not only during potentially heated negotiations, but any time the process looks to be stalling, the advisor can shoulder the blame in order to put the process back on track.  Keeping the principals one step removed during difficult negotiations allows them to maintain a positive business relationship as they work through a transition with the new owners.

The experience of having closed many transactions also provides the benefit of a portfolio of workable alternatives available during negotiations and deep knowledge of structural pitfalls (for example, tying an earn-out to the lower end of an income statement) and last but not least, a network of strong deal-friendly lawyers and accountants.

The Veracap Value Enhancement Framework^TM illustrates that opportunities for value enhancement are created through timing the sale, preparing for the sale, valuation and pricing initiatives and how to realize on the value that has been created through building deal momentum in the search for buyers, preliminary due diligence, deal structuring, negotiations and closing BUT if you don’t manage the soft factors you may not close at all.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.