M&A: When is it the right time to sell?

07/15/2021

What do Walmart, Nike, Pizza Hut, and JoAnn Fabrics all have in common? They are organizations that recently acquired small tech companies, from AI to data analytics to IT. It seems like every large organization is getting in on the mergers and acquisitions (M&A) action. Since 2000, more than 790,000 transactions have been announced worldwide with a value of over $57 trillion. In 2018, the value of M&A deals increased by 4% to 3.8 trillion. It’s safe to say it’s a hot topic.

One of the most significant decisions that entrepreneurs have to make is whether to consider an acquisition. Before you proceed, however, you must have everything in order. You should know whether your sales cycle is repeatable, that you are growing, and that you’re not reliant on outside consultants to create stability within your organization. You also need to have established a technology that is desirable from a buyer’s perspective.

If you’ve checked off all the boxes and are considering an M&A deal, how do you know when it’s the right time to sell?

Here are four considerations to know before starting the M&A process:

Plan for the Exit

Thinking about your exit strategy may not be the first thing that comes to mind, but John Majeski, CEO at Portola Valley Partners, knows it’s key to the M&A process. “One of the key advantages my organization had was thinking about an exit strategy from the beginning and not losing sight of it.” Companies that plan in advance have a unique advantage – they can build their company into an entity that is desirable to a buyer.

As a company looking to sell, tailoring your operations and strategy to what a buyer will find desirable will help down the road. It demonstrates that you are thinking of a larger, more strategic vision and have the buyer’s interests in mind. Jim Reilly, Founder of Stonepine Advisors, explains, “Companies achieve optimal value when they are bought, not sold. You need to prep yourself from the beginning and understand your ecosystem and how you can fit into the buyers’ strategy.” By taking this route, you can figure out on day one who to talk to about M&A partnerships. Even if the timing isn’t quite right in the market, at least the buyers will know who you are, and your organization will be on their radar.

Consider External Market Timing

When it comes to M&A, many market variables weigh into when a deal can happen. XRocket.io founder, Mark Addison, describes the journey, “A lot of magic needs to align – you can have the perfect company at the right time with the right numbers, but if the market isn’t there at that moment to support an acquisition, then it could be for nothing.”

Companies need to take a deep look at both the growth in their sector and general GDP growth to determine whether there is a need for their product or organization at that time. For example, tech companies need to see whether there is consistent market growth in their specific technology area over time. Also, being aware of what market capital is available in the industry is crucial. Organizations should do their homework on what interest rates are like at the time of sale – a low rate is critical to getting the top deal possible.

Have a Clear Financial Model

One of the biggest mistakes companies make when looking to be acquired is not understanding their financials. Understanding your financials seems like a given, but the financial information needed for a deal goes way beyond yearly revenue, sales numbers, and net growth. It involves detailed 2-3-year forecasting as well as growth models, both standalone and consideration of market variables, like trends and product needs. The prep work for an M&A deal is detail-oriented and meticulous, and any surprises along the way can derail a deal fast. Start by thinking through what a 2-3-year model looks like financially and how you’re going to get there. From there, build a data room and ensure all your documents are stored electronically and readily accessible to increase the due diligence process’s ease. Ensuring you’re tracking everything, including the change of control provisions in your vendor contracts and customer contracts, is crucial to avoid any snags along the way.

Create a Strategic Vision

It’s not enough to have sales and capital — you need a robust and strategic vision. Put yourself in the buyer’s mindset. If your company has a niche product, buyers will want to know how to build that niche into a more significant part of the market, much like they are doing through the acquisition. Sellers need to dive into initiatives like expanding supply chain operations, financial systems and integrating the cloud into accounting processes. It’s also essential to identify specific leaders with a strategic vision to bring you into the next league in the market. Whether that’s a CEO, CFO, or other executives, the vision has to be united and focused on the future.

So how can organizations make it happen? As Robert MacIntosh, VP of Corporate Development at Autodesk, explains, “Whether you’re the buyer or seller, everyone should care about speed, certainty, and value.” By planning early and often, making sure there is certainty in your evaluation, and offering value to a buyer, you can find success in sealing the deal.

Ready to make it happen? DLC can help.

The DLC team works closely with sellers to ensure financial and operational reporting, KPI metrics and trending data are presentation ready and available when preparing for a transaction. DLC consultants have the right blend of technical and execution-oriented finance and accounting skills, strong communication, and sensitivity in approach that are needed to successfully support businesses that are preparing for a sale event.  If you have questions or need assistance, please get in touch. Learn more about our other services here.

About the Authors

Marcia Ayala

Marcia joined DLC in 2006 and now serves as Managing Director for the Chicago market, where she is responsible for new business development, talent acquisition, talent retention and the overall operations of DLC’s Chicago office. She’d previously served as Client Account Director, where her responsibilities included consulting as well as sourcing, managing, and leading client engagements. She has over 20 years of finance and accounting experience working with both Fortune 500 and privately held businesses concentrated in healthcare and pharmaceuticals, consumer and industrial products, education, insurance, and financial services. Marcia is a CPA and a Project Management Professional (PMP). Her consulting focus has centered on acquisition integration, due diligence support, purchase accounting, carve-outs, and divestitures, shared services, FP&A, business unit reporting, and project management.

Prior to joining DLC, Marcia was the Chief Accounting Officer for a GTCR portfolio company where she led the finance and accounting integration related to the purchase of 11 businesses. Marcia began her career in audit at Arthur Andersen and also held finance positions at Kraft Foods and Harley-Davidson Financial Services.

She received her Masters of Business Administration in Finance from the University of Chicago – Booth School of Business, her Masters of Science in Accountancy from DePaul University and her Bachelors degree from DePauw University.

Dak Gilinsky

Dak Gilinsky

Dak Gilinsky joined DLC in January 2018 as Managing Director for the Los Angeles market. In this role he oversees the Los Angeles DLC Sales team and is responsible for account management, business development, talent acquisition and retention for the consultant bench and internal roles, as well as overall management of market performance. Dak applies a broad knowledge of various industries and functions developed during his 9+ years in professional services, including management consulting, finance and accounting, and legal. He knows the LA market intimately, and has served many of the market’s top companies.

Previously, Dak helped to launch the Los Angeles office of Axiom, a leading provider of legal services. He then spent two years in management consulting, serving F-100 technology clients. In 2013, he was tasked with launching the Business Talent Group’s West Coast consulting practice. During his time with BTG Dak established relationships with corporate development, strategy, and operations groups at 50+ Fortune 1000 clients along the West Coast, driving rapid growth with high client satisfaction.

Dak is a SoCal native, a lover of all things outdoors and a frequent traveler. He received his BA/BS from UC Berkeley (with honors) and pursued additional accounting and finance education at UCLA.