I expect 2021 will be a year where there is a lot of M&A activity as businesses weakened by the impact of the Corona virus are snapped up by rivals with a bit of cash.
The simple equation of M&A is that the price to be paid for an acquisition will be determined by the assessment of the risk and reward by the buyer. The seller can influence the equation, by managing the perceptions of the future risk and rewards, but at the end it is the buyer who determines the price they will pay. It is then up to the seller to accept or walk away.
Risk and reward are determined by the buyer as the assessment of future cash flow from the acquisition, together with any strategic benefit or cost advantages that may accrue.
Often when there is a disparity, there is an arrangement of an earnout period with KPI’s attached to payments.
This is in effect, a risk reduction strategy of the buyer, at the expense of the seller.
It is often the case in SME’s that the enterprise is apparently dependent in some way on a few individuals in the business, and their relationships with customers. The transfer of these relationships is often the key to the future cash flow.
However, it remains that an earn out is the buyers risk mitigation at the expense of the seller.
The seller may choose to take a lower price as an alternative and go sit under a palm tree rather than working in the business he/she previously owned.
Maximising the price for the seller therefore becomes a marketing task, completed prior to any detailed negotiations.
This is no different to tarting up your home before you put it on the market.
Your real estate agent will tell you to fix the fence, paint the interior, do a bit in the garden, make sure all the light fittings work, remove all the clutter to make the place look bigger, and perhaps rent some designer furniture to maximise the price. When selling your business, the advice will be similar.
Do a Due Diligence process for yourself. Anticipate every question that will be asked, and answer it before it is asked, thus removing it as a potential stumbling block.
It is never too early to polish the assets of the business, and work at reducing the liabilities, irrespective of whether or not it is on the market. You never know who might blow in for a look, and everything is for sale, for a price.
Why do SME owners with a valuable asset for sale so often ignore common sense advice?
