While there are constants that all parties in a deal look for — strong financials, strategic synergies — sometimes a deal comes down to idiosyncrasies.
BCD CEO Jeff Burgess has been getting calls from deal professionals and private equity firms for years about the potential sale of his business, but had no intention of considering a deal. But in mid-July, he saw one call through and only because he wanted to find out what his company was actually worth. Unexpectedly, he was engaged with an investment bank within a week, and a process was soon underway. Seven potential suitors were narrowed to two, and the final decision came down to one point.
"After all that time and effort and due diligence, it all came down to which one did my family and I like the most because we'd have to live with them for three to four years because it was a minority investment," Burgess says.
Buyers, on the other hand, are looking for certain traits such as the target's track record over the last few years of growth, profitability, rising margins, an attractive end industry, an attractive customer base, says BMO Harris Bank Director - Corporate Advisory John Chalus. Sometimes those get a little nuanced depending on the industry. For example, companies right now that have exposure to infrastructure have a natural tailwind possibly over the next few years since the passage of federal infrastructure spending.
But there are some other traits that are always attractive, like sticky revenue — when customers need your product gives you pricing power in the marketplace. There are also industry dynamics that are attractive, such as the power dynamic between customers and suppliers that favors the underlying business. And something he says that's important but is under-appreciated is evaluating where the relationships lie in the business.
"We always advise clients, as tempting as it is if you're a founder or an entrepreneur or a family-run business to be the point person and have those relationships, from a valuation perspective your value will be enhanced by pushing those relationships down into the management team further so that they are institutionalized across the company — they don't reside with a single person — because that's risk," Chalus says. "There's risk that that person leaves, there's risk that that person has a health problem and passes away, there are all sorts of risks that go with that that could be existential risks for the business. But if it's been institutionalized down into the organization, it minimizes that risk to a degree."
It's also important, he says, as companies strategically deploying capital leading up to a transaction three five years down the road, to identify who you are today, identify the traits that are most desirable in the marketplace, and then deploy capital in a way that gets you from point A to point B so that you begin to obtain some of these attributes and really make your company more desirable.
"The goal is to make a process down the road that is both competitive in the way of having a lot of buyers at the table a lot of desirable trades, but also high multiples," he says. "So, high valuation with a high competition."
Burgess and Chalus, along with BDO Consulting's Robert Berdanier and Tecum Capital's Matt Harnett, discuss the nuances of selling and buying a company, and how to conduct due diligence and successfully negotiate deal terms in this new normal. Hit play on the video above to catch the full conversation.