The decision to pursue an M&A growth strategy can benefit your firm, but it helps to know what you’re doing on the front end.
At our annual Hot Firm and A/E Industry Awards Conference in September, I had the pleasure of moderating a powerhouse panel of M&A experts during an hour-long breakout session. We had two seasoned buyers represented, our own Mark Zweig, and an M&A attorney with almost 200 deals within the A/E industry.
I won’t be able to do justice to the conversation, but I can share some of the key takeaways from that remarkable session.
- Vest authority to the smallest group of people that are essential to the actions they are approved to take. We know of firms that have an M&A committee that is larger than the firms they seek to acquire! If your firm wants to pursue inorganic growth options, agree ahead of time who is going to be involved, make that group as small as possible, and establish the limit of their authority to evaluate opportunities before you begin the process. Once that leader or small team crosses the pre-determined hurdle, whether it’s an in-person meeting, building a financial model, or discussing deal terms, they will be responsible for reporting their recommendations to the larger group.
- The seller’s leadership is valuable. If you are considering an external sale as part of your exit strategy, make sure you have plenty of time to devote to ensuring the success of the transaction after closing. The buyers on our panel reiterated that they are acquiring the skills and talents of the employees of the firm, and the buying firm needs the management experience and leadership of the seller’s key folks to make that happen. This means that firms that want to sell need to start years in advance – at least five years – of their targeted retirement date if they want to receive the highest value for their enterprise.
- Bring in the experts. Firms that try to avoid retaining external support – especially legal advisors – until the last possible second are not doing themselves any favors. M&A attorneys with experience in the A/E industry are worth the premium. Your regular corporate attorney (or your brother-in-law public defender), is not oriented at closing deals. Attorneys are generally focused on identifying risks. M&A attorneys are focused on finding the way to the closing table with solutions to these risks.
- Entrepreneurial firms are creative and opportunistic. The less restrictive your criteria for identifying a target firm, the more likely you are to find a great deal that makes sense. When you have a stringent set of parameters that the seller must meet for your firm to consider them, once you find that unicorn, you’ll end up overpaying. Each of the panelists identified a few examples of unexpected firms that ended up combining effectively.
- The purchase price is not what you think. M&A neophytes often express concern that they cannot afford the cash outlay for a firm valued at, say, $5 million. The value can be paid in a variety of ways, and no one is going to need to pay $5 million at closing in cash. Notes paid over time, incentives and bonuses for hitting certain performance metrics, stock in the buying firm, compensation bumps, liquid assets (cash and A/R), retained by the seller – these are all different forms of compensation that we can use to get to that $5 million figure. To determine the form and the timing of the payment, you have to understand the motivations of the seller – why are they participating in this negotiation? What are their challenges? What are their goals? Just asking what the seller wants will reduce the time spent negotiating and will make for a much more pleasant experience.
These are just a few examples of the wisdom shared by M&A experts during our panel. The decision to pursue an M&A growth strategy – especially if your firm has not done so in the past – is a bold move that can change the course of your company’s future in ways that are impossible to know on the front-end.
If your firm is considering M&A in the future, I have one more piece of insight from this panel that I’d like to share: every participant agreed that they are thrilled with their firm’s decision to pursue M&A as part of their growth strategy.
Jamie Claire Kiser is Zweig Group’s director of M&A services. Contact her at email@example.com.