One of the things Mereo Capital Partners Co-Founder Leo Helmers says his firm wants to do is assess the probability and likelihood of close when considering an acquisition. An indicator that a company is likely to close is that they’ve enlisted the help of a good advisor.
“That shows commitment by the seller,” Helmers said at the Philadelphia Smart Business Dealmakers Conference. “They're willing to spend some money and they’re vested in the process. We had one situation where the firm had no adviser. We chased it for nine months, three letters of intent, multiple trips there. It was all optionality for them. And we finally walked away from the opportunity because they didn't really have any skin in the game.”
An adviser is also helpful in getting a seller through the pain-points of a sales process. Helmers says processes are time-consuming, overwhelming, exhausting, sometimes demoralizing and also distracting from running the business. And because a process is very time consuming, if the management team and the owners are strapped, they need help to get through that. Buyers would like to see those resources in place.
The firm also wants to see a personal catalyst with the seller — a retirement on the horizon, no children to take on the business, a need for liquidity.
“In 2020, you had a surge in M&A volume because people were afraid that the capital gains tax rates are going to go up in 2021, a change administration,” he says. “So, a lot of founders were like, I need to get out now. That is a good sign for us. There's a motivated seller.”
Other favorable situations for buyers are when there is discord among shareholders. Shareholder alignment, he says, is important. When there is discord among shareholders and family members need to get out, he says his firm is happy to come in and provide a custom solution — that might not be a full buy-out of the business, but rather a minority stake in the business to help solve some problems.
Business catalysts that can lead to a sale, in order of probability of a close, according to Helmers, are:
- A company looking for operational or strategic help — they don’t necessarily need the capital, but they want to professionalize their business.
- A need for capital for growth investment — they don’t have it themselves and they need to turn outside to get it.
- They have an acquisition teed up but they don't have the capital and need a partner to help complete it.
- A looming debt maturity.
- A liquidity crisis and they desperately need cash.
Those senarios, however, can also represent increasing risk.
“We recently came across a transaction where the business needed operational improvement,” he says. “It had substandard margins and deferred capital maintenance capital expenditures, so they kept putting that off. It needed capital for growth, and it had a debt maturity coming up. So, no free cash flow. We bid three times. We actually had a dialogue with them, but as we dug in deeper, we realized there's a bit of a liquidity crisis here. They need capital right away. We decided not to go for that. We don't like deep turnarounds.”
It’s also important, when a business looks for a potential transaction in the market, to leave room for upside for the buyers.
“Way too many sellers are looking to time the exit perfectly,” he says. “If they get it wrong and they're on the backside of things slowing down, they could have a problem in the sale process. You always want to leave something on the table for the buyer. Every buyer wants to see a path to value creation.”
Something else to consider is momentum.
“Somewhat related to the upside is if the business falters or experiences any kind of stress or deterioration in financial results in the sales process, you’ll have likely a retrade or busted auction,” he says. “So, I'll encourage you to think about that, if you go to market, that you do have good runway.”