Buying a TMT business is not easy and many potential acquirers underestimate just how complex and challenging the acquisition trail can be. One only has to look at AOL’s US$85.4 million acquisition of Time Warner, that took 17 years to finally unravel, to know that without the right amount of preparation or advice things might take a little longer than expected.
The plan was to combine Time Warner’s impressive media capabilities with AOL’s 30 million internet subscribers to form a powerful broadcasting conglomerate. However, the execution of the deal proved problematic and the result was a financial train crash for all concerned, taking years to hit the buffers. A little more focus on planning during the acquisition process might have proved pivotal to its success. AOL’s founder and CEO Steve Case, the lead architect of the deal, said afterwards: “Having a good idea is important, but being able to execute the idea is even more important, and that comes down to people and priorities.”
Generally, there is a popular misconception there must be something wrong with a business if it is up for sale. This cultural stigma, often leading to the suspicion that the business might be about to go under, that the financials are poor or the founders are hiding a dark secret is (mostly) nonsense. A good M&A advisor will tell any prospective acquirer, particularly in the mid-market, that the more likely reason for a disposal is an owner’s life-style requirements or that they just want a change.
Finding a company that suits a buyer’s exact requirements can take between 12-24 months or perhaps even longer and may be an exhausting process. In many cases a successful conclusion is the exception to the rule and statistics suggest that buyers will have seen 100 MOIs, done preliminary due diligence on 15 targets, and signed two to four letters of intent before they achieve a single acquisition. A lot of time and effort can be expended and many acquirers simply give up trying to find sellers as the hunt can turn into a full-time job long before any real progress is made.
On paper, the process of buying a business looks to be a simple one. Once the criteria are established, prospective targets found, due diligence completed and the seller fully engaged it should be a simple task to agree on a valuation and make the transaction happen.
It sounds easy, but the reality is a lot more problematic. It is at the point when buyers and sellers engage, and a higher level of granular detail is required, that the show-stoppers start to reveal themselves. There is a multitude of common complaints from prospective buyers that prevent them from proceeding. Too much owner reliance, incomplete financials, poor credit controls, high revenue dependencies on too few customers, and unprotected IP are all common causes of buyer frustration. Put this together with an unrealistic valuation and it is unsurprising that so many deals remain uncompleted.
How, then, should a committed buyer proceed along the path of achieving their acquisition targets? As M&A business advisors to the TMT market for over 20 years, Evolution Capital advocates the use of expert services to empower buyers in the process. Here are a few of the reasons why,
1) Saving time
Finding the right businesses to buy is a lengthy initiative that needs resource and great patience even before the first discussion takes place. A good business advisor who knows the industry sector will know all the likely candidates that will fit the buying criteria. The amount of time saved by engaging with a market expert will be well worth the investment and will save the buyer from time-consuming dead-ends.
2) Understanding the fundamental drivers of the business model
All vendors will do their best to present their business in the most favourable light. This will invariably mean finessing the earnings model as part of the make-over e.g. by increasing recurring revenues or lengthening service contracts. It is vital the prospective acquirer is able to get under the bonnet immediately, in order to get to grips with the company’s fundamentals. An expert adviser will understand all the nuances of the seller’s market space to pinpoint any anomalies. They should also be able to highlight inconsistencies in the cash flow or assess the business’ competitive advantage in terms of unique assets, USPs or key market differentiators. For example the seller’s USP could be based purely on their personal network which might not be a transferable asset in the event of a change of ownership. An expert will help the buyer pick up on such incongruities straight away.
3) Engendering an environment of co-operation
The buyer will need to connect with the seller on a number of different levels and a good adviser will contribute. Business owners will have a strong emotional attachment to their enterprise and the staff that have helped them achieve success. Many will be genuinely concerned about the future of the company under new ownership. The buyer will probably need to understand the vendor’s motivation to sell, to quickly pick up the fundamentals of the business and to identify any blind spots. To achieve all this it will be vitally important the two parties connect in terms of business values and a common language. Engendering an atmosphere for a trusting buyer/seller relationship is essential to making a timely transaction and a good advisor will ease the process forward in the difficult times when rocks in the road have stalled progress.
4) Leading the buyer through the due diligence maze
Once seller and buyer have agreed, in principle, that a disposal is a likely outcome, it is time to conduct the onerous task of due diligence. This process needs forensic examination because numbers (and data) seldom lie. Information has to be extracted from multiple sources including management accounts, annual reports, financial accounts, employees, supplier contracts and customers. In small companies, financial information is not always readily at hand, making the search for it burdensome but still essential. The speed at which the information is made available will give the buyer a good idea about the state of the business and it is crucial that raw data is investigated to understand trends in revenue, margins and discounts.
Appointing an expert adviser will accelerate the due diligence process, which must leave no stone unturned. They will know all the questions to ask, where to find the information and will provide the buyer with any potential show-stoppers. Making a no-deal decision, whilst incredibly frustrating, is far better than going ahead with a bad deal. Appointing an expert might seem like an expensive option, but will certainly pay dividends in the long run.
5. Applying common sense to the valuation
It is one thing to run sophisticated financial models to justify a satisfactory valuation and it is another to know where to apply common sense to get something that works. Owners are often unrealistic when setting the acquisition price and a pragmatic approach is essential to bring a deal to a successful conclusion. Industry benchmarks such as earnings multiples are often a good source of providing objective evidence but the focus should ideally be on the bottom line free cash flow.
Valuing an organisation is an area where an expert adviser is well worth his fee. They will apply industry ‘know-how’ and specific metrics to establish a workable valuation. Bringing two parties together in agreement is an area that requires logic, empathy and a good degree of emotional intelligence. Buyers should ensure that the price represents good value even if they have to pay slightly over the odds and it is better to pay too much for a good business than to pay too little for a bad business.
Investor Warren Buffett said: “Price is what you pay. Value is what you get.”
6: Providing comprehensive deal management
Finally, the buyer, having chosen the business, negotiated the terms and secured the necessary funding can think about completion. As the deal concludes, issues may arise that need careful negotiating. Perhaps a financial irregularity, a legal peccadillo or even an onerous customer contract could turn into a showstopper if left unattended. An expert adviser will not only see the problems coming but will be able to head them off and find a resolution. It is important the adviser has all the necessary legal, financial and commercial resource (and clout) at their disposal to tackle the ice-bergs before they sink the ship. Deals need momentum from start to finish and they need to be kept rolling because once they stop, the hiatus can be terminal.
The final word goes to Tom Carroll, owner of Our It, who successfully sold his business in 2017: “We were approached by Evolution Capital, on behalf of a potential buyer, who was interested in buying my business. Their input into the deal was vital and they provided some much-needed momentum whenever the process became protracted and threatened to stall. They were retained by the buyer but demonstrated to me, the vendor, significant acumen, expertise and integrity throughout the process to ensure satisfactory completion.”