You can never be too prepared to make a deal. Even if you don’t end up completing a transaction, the work that you put in preparing for M&A activity is always worthwhile, says Al Melchiorre, president and founder at MelCap Partners LLC.
“Making sure you have your successor in place, making sure you have a strong management team in place, that you have diversification within the customer ranks, that you’re continuing to reinvest in the business,” says Melchiorre. “All of those things, among many others that you do that will help enhance the value of the business are just good operating procedures to live by.”
Melchiorre started MelCap Partners in 2000. The company is a partner in Globalscope International M&A Advisors, which provides access to more than 600 investment bankers around the world.
Smart Business Dealmakers spoke with Melchiorre about the liquidity in today’s marketplace and the importance of being confident in what you’ve achieved when you’re looking to sell your business. What follows is a transcript of the above video, edited for readability.
It’s still good to be a seller
The current dealmaking environment is very robust. One of the big drivers of that is the amount of liquidity in the marketplace. When I’m referring to liquidity, I’m really looking at both strategic and financial buyers. So if you look at the financial buyer world or private equity, there is an estimated $1.7 trillion of uninvested capital that is available looking for good companies to invest in.
On the other side, when you look at strategic buyers, there is literally trillions of dollars of cash sitting on their balance sheet. So you have both of these groups that are looking for ways to continue to grow and expand and actually get a return for their investors. So deploying that capital and acquiring good, successful, profitable businesses is what’s really driving it. Based on those factors, it really is a seller’s market right now.
The forces that drive M&A activity
The liquidity that is being driven by the private equity market, really, if you think about a portfolio, a portfolio consists of stocks, bonds and cash. So you have these investors, especially on the equity side of it, that are looking for additional yield and return. And this illiquid class, which is deemed private equity, is where investors are looking for additional returns. Because of the success the private equity investors have had over the years, it’s driving additional interest, not only from existing investors, but also from new investors coming into the market.
Dealmaking is never easy
We are definitely in a seller’s market. As a result, there will be a number of suitors that are interested in your business. That being said, it is still a difficult process to get transactions done and a lot of prospective buyers are spending a lot of time on due diligence. The last thing you want to do is to make a bad investment. So even though there is a significant amount of liquidity in the market, there is also a significant amount of due diligence that will take place as the buyer goes through that process to make sure they are making a good investment.
M&A readiness is good for your business
I think it’s important for a company or a client to always be ready in the event a prospective buyer may be coming along. Part of that preparation is also good practice for the business. Making sure you have your successor in place, making sure you have a strong management team in place, that you have diversification within the customer ranks, that you’re continuing to reinvest in the business. All of those things, among many others that you do that will help enhance the value of the business, are just good operating procedures to live by. If you continue to follow those, when those opportunities do arise, you will be ready.
You may only do this once
What’s interesting is probably one of the most difficult things that we see, especially with the privately held business owner, they have advisers to help with a lot of the technical aspects of a transaction. But the emotional side of it is something that, they may realize this is the right thing to do for the continued success of their business and to transition. But the emotional side of that can be very difficult, to actually let go of the business. Many times we will have to counsel them more on that and help refocus them back on their goals and objectives. For many of our clients, this is the most significant liquidity event in the history of their lives. They’re only going to do this once. So it’s important we kind of hold their hand through that process, not only working with other members of the deal team, but also being counselors and advisers to them. That’s a real important process.
The power of entrepreneurship
We had a client who started their business about 20 years ago and borrowed $7,500 from his mom to start the business and grew it to over 100 locations over 20 years. That is a great story. The other thing with that individual that is very interesting is when we were getting ready to do management presentations, he was looking at the bios of all of the prospective buyers that were coming in. They’ve got all these advanced degrees. He looks at me and he says, ‘Al, I only have a high school GED. How am I going to communicate with these guys?’ I told him, ‘Believe me, you are going to do just fine. They are very impressed with what you’ve accomplished and are excited to work with you.’
