Where Finance and M&A Meet: How To Execute A Successful Business Sale or Purchase

When it comes to business transactions, preparation and expert guidance are essential components of success. In this comprehensive guide to buying and selling businesses Kevin Briscoe, the Managing Partner of CFO Selections, provides key insight into the finance and accounting information you need regarding middle-market business sales, acquisitions, and mergers. It is meant to provide guidance to business owners, CEOs, and/or finance and accounting teams that do not have previous experience with these types of business transactions, particularly in the areas of finance and accounting. This resource can help to augment their preparedness by offering the advice of professionals who are experienced in these types of business deals. We hope you walk away with some actionable advice on how to be better prepared for a business sale or acquisition!

Before you dive into this article, check out Maximize Your Business Sale Price: Essential Tips for Top Returns to help benchmark your readiness.

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Documentation is a key component of an organization’s preparation for M&A activity. An understanding of the role played by the Letter of Intent or Term Sheet and the corresponding required content is helpful in paving the way for the due diligence process as well as establishing the framework for the Purchase and Sale Agreement.

Transaction readiness in the areas of finance and accounting has the benefit of:

• Minimizing disruption to the underlying business while the transaction is being negotiated.
• Increasing the likelihood that the structure and details of the transaction are mutually beneficial to all parties involved.
• Accelerating the completion of the transaction.

From a seller’s perspective, an in-depth knowledge of the company’s financial, legal, and operational structure can be very helpful in tailoring the otherwise generic representations and warranties that will comprise much of the Purchase and Sale Agreement.

Takeaway: A significant amount of business sale documentation either directly or indirectly forms part of the Purchase and Sale Agreement and must therefore be compiled and organized to finalize the transaction. This is an area where the presence of finance and accounting leadership with prior transaction experience may be of great benefit in completing the transaction in a timely manner.

Financial Buyers

A financial buyer is usually a private equity firm looking for a return on funds provided by its investors. As such, a financial buyer generally employs reasonably specific business valuation criteria and is unlikely to pursue a business with volatile or below average financial performance.

Many financial buyers go into a transaction with some form of holding period in mind, after which they intend to exit the investment through sale to another investor or a strategic buyer. As such, financial buyers pay particular attention to the:

• Strength of the business model
• Quality of management
• Competitive positioning
• Sustainability of profits and cash flows

Financial buyers often employ outside consultants to perform pre-acquisition due diligence in areas such as accounting, tax, risk management, employee benefits and information technology.

Takeaway: Because financial buyers almost always employ a formal, disciplined, and detailed approach to their due diligence, a seller’s management team (especially its finance and accounting staff) must be well-organized and possess the bandwidth to effectively respond to data requests and analytical inquiries while continuing to support ongoing business operations.

Want more insight into what buyers are really looking for? Read 80% of Business Owners Aren’t Ready for Transition: How to Prepare for a Successful Business Exit

Strategic Buyers

Strategic buyers are generally companies in the same or a complementary industry as the seller who are looking to profitably expand their operations through business acquisitions.

While financial performance and anticipated returns are often key considerations to strategic buyers, “strategic fit” and potential operational synergies often provide a greater impetus to complete a transaction. In particular, the strategic buyer is likely to focus on its ability to sustain or expand the seller’s revenue stream while eliminating the portion of the seller’s cost structure that duplicates resources the buyer already possesses.

Reducing or eliminating the seller’s overhead after the acquisition is often a critical operational synergy and means the acquired business will likely see staff layoffs once the transaction has been completed. Sale to a strategic buyer may therefore bring with it an element of uncertainty or instability in the seller’s workforce that the seller must be prepared to face.

Explore how strategic alignment and timing can drive your valuation in Avoiding the Perfect Trap: Choosing the Right Time to Sell.

Buy Side

Buyers often employ deal-experienced finance and accounting resources to provide the analysis aimed at confirming that the deal is the right decision at the right price. This support, and the resulting transaction documentation, can be useful in addressing the concerns of the buyer’s stakeholders who often exert scrutiny regarding acquisitions.

Buy-side financial resources will analyze the relationship between historical and projected future financial performance to enable the buyer to focus on deal drivers that pose the greatest investment risk or opportunity for return.

On the Buy Side a financial transaction support team will:

• Conduct a profitability analysis by business segment, customer, product, or service
• Identify or confirm synergies that may be employed in strategic business modeling
• Evaluate a potential acquisition’s financial reporting systems
• Lay the groundwork to determine the financial statement impact including accounting policy and purchase accounting analysis
• Enable an understanding of all liabilities and assess the quality of the assets to determine final purchase price

This support group will employ tools such as a detailed trailing 12-month trend analyses that overlay historical results on top of projected future performance and can provide a roadmap to potential transaction landmines or post-transaction value creation opportunities.

Check out Ready for a Sale? Right-Sizing Your Investment Bank Partner for more insight on finding the right advisor for your deal.

Sell Side

Middle market business sales often involve an ownership group that is looking to monetize all or part of its investment. In addition, a founder or family-owned company may be looking to fund retirement, support future generations, or find a partner who will protect the legacy of the business.

Takeaway: A business owner with no prior transaction experience is likely unaware of the resources required to accelerate the transaction close and simultaneously minimize business disruptions. The right finance resource can assist ownership in evaluating divestiture risks and rewards and prepare them to execute the transaction.

• On the Sell Side a financial transaction support team will:
• Perform a quality of earnings analysis and calculate Normalized EBITDA
• Conduct trailing 12-month trend analysis
• Demonstrate consistent customer volume
• Carve out accurate standalone financial data for any business segment

Sell-side finance and accounting support is critical in guiding the seller’s due diligence process.

Buy Side

Takeaway: Organizations that successfully perform their own due diligence generally possess staff with significant prior transaction experience and skills.

Formulating data requests, performing analysis, and communicating with the target company’s key staff while respecting confidentiality and timelines is a balancing act many middle market buyers have difficulty pulling off.

See how OneAccord helps you maximize enterprise value in The Three Drivers of Value and how waiting too long to take action can cost you in Are You Holding Your Breath? The Hidden Costs of Complacency.

Sell Side

From a finance and accounting standpoint, companies that are best prepared to undergo a sale transaction have:

• Experienced, highly competent staff
• Clean, audited or reviewed financials
• Budgets and forecasts
• Organized documentation

Takeaway: In most transactions, the seller’s finance and accounting functions will be required to populate a data room with a wide variety of documents.

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Avoiding the Perfect Trap: Choosing the Right Time to Sell