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Mergers and acquisitions in 2013

According to PwC, increased merger and acquisition activity in the United States during the closing months of 2012 offered a glimpse at what 2013 has in store—more deals fueled by companies looking to leverage favorable market conditions to drive growth.

The simple truth of the matter is that after years of recession and a slow economic recovery, many businesses are regaining momentum in a multitude of markets across many industries. Coupled with low interest rates and a growing number of businesses available for purchase, opportunity abounds for buyers and sellers alike.

For sellers, the question that must be answered is pointed: is selling the company you’ve worked many years to grow the right decision for you?

For buyers, it’s a matter of defining your goals and doing your due diligence. What will you gain from the acquisition, and will you get the positive return on investment you’re looking for?
Either way, orchestrating a successful transaction requires deep knowledge of industry and market subtleties and the ability to analyze complex factors that are often unique to the needs of the seller and desires of the buyer.

Understanding the needs of the seller

A business owner might look to sell for several reasons, but it generally comes down to liquidity. This is especially true for baby boomers. In fact, according to the New York Times (“Are Baby Boomers Ready to Exit Their Business”), 9 million of 15 million American business owners are baby boomers, and experts estimate that within five years 40 percent of them will transition their business into other hands.

This flood of baby boomers into retirement has some analysts concerned about an oversaturation of companies available to the buyer community. The result: for many sellers looking to move their company, the thinking as they move into 2013 is that the timing might not get much better.

However, the matter of timing has several layers to it. The first is obviously a return to the question presented earlier: are you ready—emotionally? The second question is whether or not your business is ready. Can you demonstrate that your company:

• has recovered from the recession,
• has a revenue stream and that overall financial stability is strong, and
• is positioned for new opportunities.

These are questions best answered by the team of professionals (accountant, attorney, and investment banker) you should surround yourself with very early in the process. This team will help you:

• review your company’s product set, value drivers and competitive advantages;
• determine a desired transaction structure that maximizes value and minimizes tax consequences; and
• put together an information book for publication to potential buyers.

Your investment banker is an important part of the team. He or she should have deep expertise in a variety of industries, and offer an expansive network of private equity firms and corporate relationships to deliver a full range of merger and acquisition options. Your banker can also help you with valuation and be engaged to find your buyer. Good investment banks are able cast a wide net that attracts a broad set of qualified buyers.

Understanding the desires of the buyer

Sellers may not want to hear this, but we’re currently in a buyer’s market. Financing conditions are favorable and competitive, bank balance sheets are in good shape and corporate confidence is high. Many buyers believe they can garner the value they seek from their acquisitions—fast and with a higher degree of certainty than in more recent years. Companies are in the market to acquire another business for a number of reasons:

• Geographic expansion. Moving into a new market can be very cost prohibitive. By buying an existing business in a desired market, companies often save money, shorten time to market penetration and assume an existing customer base.

• Expansion of capabilities through the integration of new technologies and implementation of acquired processes.

• Supply chain management. In certain situations, few vendors may be available to meet a company’s needs. Acquisition allows a company the ability to mitigate risks by bringing these processes in house. This can also add a layer of quality and price control.

• Take out the competition. This presents an opportunity to build brand awareness and can offer companies relief from pricing pressure within their market.
For strong buyers who identify the right target, there will be no shortage of lenders willing to work with them.

Understanding the transaction process

Mergers and acquisitions are an involved and lengthy process, and they are complicated by the fact that the valuation model varies from deal to deal. But at the end of the day price is typically set by the financial needs of the seller, including tax considerations and the value the business holds for the buyer.

This is why it is important for both sides to work with a dedicated investment banker. The seller and their team will put together a book of information, which is then distributed to a team of targeted buyers. Potential buyers will submit letters of interests. Then potential buyers complete their due diligence to ensure the acquisition is sound from a financial, strategic and cultural standpoint.

The outcome: a win-win scenario—sellers meet their goals while minimizing tax consequences and buyers obtain the financing they need to drive revenue.

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Douglas Dell

Douglas Dell is Senior Vice President and Manager of KeyBank’s Commercial Banking Group in Denver. He has more than 15 years of experience working with employee-owned companies as both a banker and a CFO. He is a member of the ESOP Association and of the National Center For Employee Ownership. He can be reached at douglas_dell@keybank.com.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. ©2015 KeyCorp. KeyBank is Member FDIC.

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