The M&A market hinges on confidence: Unless a buyer is confident your business will deliver solid returns, you won’t be an attractive target. Yet the current economic climate is highly uncertain, making even the most optimistic buyers pause on placing bets on many target companies.
But while M&A activity has begun to cool, that may not be the case for long. Even if you’re not ready to go to market today, you should act with a sense of urgency to prepare your company for the return of a hot M&A market.
M&A Activity May Rebound Sooner Than You Think
From an M&A perspective, the current environment is much different than the Great Recession, when deal volumes shut down and took years to recover. The downturn that began in 2008 (and inhibited M&A activity for a long time) was a credit-driven event fueled by the subprime mortgage crisis and high levels of household debt. Today, the chief problem is that consumers and businesses have too much liquidity, driving up demand and inflation. This fact, coupled with strong fundamentals like healthy corporate balance sheets and a robust labor market, makes 2022 markedly different from 2008.
In fact, today’s market bears more resemblance to the early stages of the pandemic, when we experienced a sharp but brief dip followed by a rapid recovery. In the aftermath, M&A enjoyed a record year because there was tremendous pent-up demand for deals and significant capital to deploy. Similarly, private equity (PE) groups and corporate balance sheets are now holding a lot of dry powder just waiting to be put to work. What’s holding buyers back is a combination of uncertainty and M&A supply/demand imbalance.
As it always does, buyer uncertainty will wane as the economy begins to stabilize, with inflation starting to drop and interest rates moderating. And the M&A supply/demand imbalance will start to reverse once private company owners (whose average age is 60+) decide that the improving conditions make it a great time to exit the business.
Both factors will cause a significant rebound in M&A activity, and odds are it will happen sooner vs later.
How to Prepare to Sell Your Company in the Meantime
Much has been written about “how to prepare your company to sell at a good price.” Of course, you want to pursue activities and opportunities that drive top-line growth, reduce operating costs without sacrificing quality, and identify the value drivers in your business so you can align your resources accordingly. You’ll also need accurate, complete, GAAP-compliant financial statements to illustrate your performance to date, along with robust financial models that forecast where you’re headed based on sound assumptions.
As important as these steps are in preparing your business to sell, they don’t tell the full story because they aren’t specific to the current market and don’t address how buyers behave after a period of uncertainty and volatility. As you get your financial and operational house in order, consider these two additional strategies to help your business move into the pole position in a competitive sale situation.
Mitigate Concentrations of Risk
Buyers never like risk; but as M&A activity rebounds following these uncertain times, buyers may be more risk-averse than usual, at least initially. One way to improve their confidence in your company is to reduce any risk concentrations.
For example, if a single sales rep is responsible for generating 30 percent of your revenue, you may need to hire additional reps or rebalance the sales team’s responsibilities. If a single customer represents 40 percent of your revenue, you should ramp up your marketing activities and attract new business to diversify your customer base. If you rely on a single vendor for a mission-critical part or product, you should identify alternative sources to mitigate the risk of supply chain constraints or vendor-specific interruption.
Even your intellectual property (IP) can represent a risk if you have IP that’s critical to your offering, but you haven’t taken steps to protect it with patents or trademarks. In that case, it’s time to engage counsel to get those applications in progress.
Buyers evaluate the strength of your revenue streams and your quality of earnings when deciding whether your business can generate a strong return on its investment. Increasingly, the highest-performing companies in their industries are implementing practices to generate leads, revenue, and profit in a more predictable way.
For instance, we’ve seen services companies that have marketing down to a science, using a programmatic approach that’s proven to generate a predictable pipeline of leads that convert to customers. They can tell you how many seconds they can keep a prospective customer on hold before they abandon the phone call and how many minutes it takes to close the deal sitting across the table from a buyer. They also know how to drive down their cost per lead by optimizing their marketing based on metrics, not hunches.
Other companies are changing the ways customers commit to orders, replacing repeat purchase orders with contractually reoccurring orders. These multi-period, even multi-year commitments, are no longer just for subscription businesses or software-as-a-service companies. Companies in nearly every industry are finding ways to ratify long-term, loyal customer relationships with contracts.
If you can show that you’re using techniques like these to drive predictable, profitable growth, a buyer will place a significantly higher value on your business.
Why An Experienced Investment Banker is More Important Than Ever
During the kind of market that we’re experiencing now, positioning your business for an exceptional sale outcome is still possible, but it requires a strategic and creative approach. That’s why it’s essential to partner with an experienced investment banker that understands how to sell extraordinary companies even in less-than-extraordinary times.
Forbes M+A has a track record of achieving strong outcomes in any market, applying a proven approach that positions leading companies to close exceptional deals through a competitive sale process. We know how to prepare companies for the rigors of due diligence, attract the perfect buyers to the table, develop messaging that tells each company’s unique story, and negotiate effectively to bring the best deal to a close.
Even if you’re not ready to sell your business today, now is the time to get your company prepared for the coming M&A resurgence. Sign up to receive our downloadable content and you’ll have access to the latest industry trends and stay informed regarding in-depth tools to help you move forward with the next steps for your business including:
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