Merger and acquisition activity involving Connecticut companies decreased over the past two recessionary, tight credit years, much as it did in the rest of the U. S. But change may be just around the corner.
Historically, the level of activity closely tracks the economy. Several reliable economic indicators now confirm that the economy is improving, and the strong stock market, which has always been a leading indicator, has clearly signaled that the recession is over. Judging by the high level of interest from both U. S. and foreign strategic acquirers — including private equity funds — a significant pick-up in merger and acquisition activity is likely in the coming months.
On the transaction front, the number and quality of deals steadily increased since the end of 2009 as the gap in valuation expectations between buyers and sellers has narrowed. Buyers have been creative in bridging valuation gaps through a combination of seller notes, an increase in the amount of seller rollover participation, and through the use of earn-outs. Most encouragingly, the credit markets have begun to thaw and banks are starting to lend again to support acquisitions.
Bottom line: For a company owner thinking about exploring the sale of his business, a “window of opportunity” is opening to do so at a fair, attractive valuation. Furthermore, owners acting soon may avoid the potential significant increase expected in the historically low 15 percent federal capital gains rate.
For most company owners, selling a business is a once-in-a-lifetime event, full of emotion and seldom pleasant until it is over. Because they have never been through it before, owners are prone to make serious mistakes during the process. By avoiding the following 10 mistakes, the sale process will be smoother and the odds of closing a transaction at an attractive price — and satisfying other objectives — will be significantly increased:
1. Having Unrealistic Selling Price Expectations — An unrealistically high price expectation deters potential buyers and generally is a waste of time for everyone. Before embarking on a sale process, an owner should obtain a professional independent valuation of the company. Having a valuation will also guide an owner to avoid engaging a merger/acquisition advisory firm which overvalues his business just to hook him into engaging them.
2. Broadcasting To The World That The Company Is For Sale — An unshopped company has more appeal to potential buyers than one that is broadly known to be for sale. The quality of potential buyers is dramatically more important than the quantity. Financial advisors should only contact serious, qualified buyers, approved by the seller in advance.
3. Talking To Just One Potential Buyer Or The “Most Likely” Buyers — In the merger/acquisition game, the most effective way to enhance the sale price is to generate competition among two or most potential qualified buyers. Company owners typically know their competitors and often focus on them as the most likely buyers. With the help of their financial advisors, they should broaden the list of potential buyers to include companies in different but related businesses, private equity firms, and perhaps foreign companies.
4. Not Getting A Confidentiality Agreement From Potential Buyers — No information should be disclosed to potential buyers without a signed confidentiality agreement preventing them from disclosing the fact that the company is for sale, or using sensitive information for any purpose other than to analyze the business as a potential acquisition.
5. Hiding A Major Problem — Nothing turns off a buyer more than learning about a seller’s major problem when it performs its in-depth “due diligence.” Disclose early in the process all potential problems, such as an environmental issue or potential loss of a customer.
6. Not Focusing On The Tax Implications Of The Sale — To avoid unpleasant surprises, the tax consequences of selling a company should be thoroughly assessed early in the process. Special tax counsel should be engaged to identify and address all tax issues and assist in developing a transaction structure favorable from a tax standpoint
7. Not Understanding The Terms Of The Sale Agreement — The sale agreement is a long complex document with representations and warranties by the seller specifically designed to protect the buyer. It is crucial that a seller understand the agreement to avoid being subject to unnecessary risks post-acquisition. Being advised by experienced legal and financial advisors is imperative.
8. Overstating The Company’s Earnings Potential — Presenting earnings projections to potential buyers which the seller knows are unrealistic or may not be achievable is a big mistake. A company seller should always go on the assumption that buyers will perform thorough “due diligence.” Should they discover that earnings projections are unrealistic, a red flag will go up and they will more closely scrutinize everything about the company.
9. Stating A Desire To ‘Cash Out” — It may be true, but it is usually a mistake for an owner to be too vocal about a desire to sell for cash and leave the business. Even if an excellent management team will remain, being too blunt about wanting to depart can often send the wrong signals. The best approach is to indicate a willingness to continue to work for, or consult with, the buyer for a reasonable transition period.
10. Trying To Sell The Company Without Professional Advisors — Selling a company typically takes 4-8 months. Most owners simply do not have the time or expertise to prepare a comprehensive sale memorandum, identify, qualify and contact potential buyers and negotiate and structure the transaction. More often than not owners who try to do it themselves later realize that they have been penny-wise and pound-foolish.
C.A. Burkhardt is senior managing director of HT Capital Advisors, a New York City private investment banking firm dating back over 60 years. He is a former financial officer of Aetna Life & Casualty and lives in Madison. Reach him at (212) 759-9080, or by e-mail at cburkhardt@htcapital.com. Burkhardt covers the Northeast for his firm, which offers a full range of merger/acquisition, financing, valuation, recapitalization and management buyout service.
