M&A last year ran at a record-setting pace in terms of deals and deal values. But everything since then has changed, says Doeren Mayhew Shareholder Matthew Gurwin.
"The ground shifted a little bit and the outlook for 2022 is still very strong, but there are a lot of factors weighing on people's minds," Gurwin says. "You have rising interest rates, you have the supply chain issues, you have inflation, the war in Ukraine, just to name a few of those. So, the playbook that's been used over the last several decades — buying companies looking hopefully for multiple expansion — that playbook is probably not going to work going forward. So, you have to find other ways in other levers to look at — revenue growth, profit margin expansion, those type of things."
MiddleGround Capital Founder and Managing Partner John Stewart, speaking on a panel that assessed how new market realities require sellers to be more prepared in order to maximize their company's value in a sale at the Detroit Smart Business Dealmakers Conference, says part of maximizing value in this new environment means finding the best adviser to help you sell your business. That can be done in part by looking for people that have sold similar businesses.
"That's really important in today's environment because the valuations are moving around so quickly that people just really don't understand what they have," Stewart says.
Echoing that sentiment is Doeren Mayhew Shareholder Aaron Partridge.
"It's never too early," Partridge says. "I have a lot of PE firms that I work with. They'll have an in-house financial analyst and they can go through and do spreads and run some numbers. But they may be missing that technical piece."
He says in one deal, a company didn't bring his firm in until later in the process and, after running the numbers, saw that the company was blowing millions of dollars of reserves through the income statement and then expecting to get paid six times on the deal, which was about 25 percent of the deal price. He says had they been brought in earlier, they could have identified that issue and found a way to address it.
In another example, a company did bring the firm in early and they were able to identify some employee retention credits that the seller didn't know about. The law firm had them write into the purchase agreement that those tax credits are the property of the buyer. When the deal closed, the firm filed for multimillion-dollar employee retention credit money to come back. That helped give them some flexibility in the negotiations for the deal price.
Stewart says sometimes when an entrepreneur approaches him about buying their business, he tries to get them to get an adviser.
"It just helps to organize and make the process more efficient," he says.
Getting someone involved early can help a seller better understand the sector. He says in one instance, the firm brought an adviser in very early to work with them. They had the adviser review each step to make sure everything created value.
"Even if it's just in your underlying business, it pays," Stewart says. "If you're thinking about an exit within the next five or 10 years, I would highly recommend getting an adviser. Have them start to learn your business, have them start to help you prepare your financial statements, have them start to professionalize your business, look at succession planning, look at product development, all of those things will pay themselves off in spades when you're getting paid on a multiple versus what you would end up paying an adviser."
Another reason to get help early is to ensure there is responsible stewardship of the business and employees are treated right once the owner exits.
"You still got to go to church with these people on the weekend and you don't want to go, Hey, I can't believe you sold to those guys," Stewart says. "So, it matters, especially in that first generation of selling the business and selling to someone responsible."
Gurwin says it's about owner operators being honest with their companies and sometimes that's best done with someone from the outside coming in to look at it.
"There's 30-some characteristics — operational, marketing, all those different things, how to run you distribution — those are things you got to look at and be honest with because when someone buys it, they're going to go through those things and their own checklist and they're going to know where the opportunity is," Gurwin says. "So, why not you as operator try to get as much value as possible? The slack of running your business is out now. You got to run it efficiently, you got to find those things."