High-value M&A exits: cultivating buyer interest

January 2025  |  COVER STORY | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

January 2025 Issue

Multiple options exist for exiting an organisation or investment, with perhaps the most common being a merger or acquisition. To maximise value, sellers must be able to steer the exit process by identifying objectives and enlisting the right external help. Prudent company owners prepare for a successful exit well in advance.

Cultivating buyer interest has, in recent years, been a challenge. Following the coronavirus (COVID-19) dealmaking boom, M&A activity has been somewhat depressed. Global disruption and uncertainty forced many companies to adopt more cautious deliberation before proceeding with merger decisions. Rising interest rates, geopolitical instability and recession concerns were among other factors driving the slump.

As some of these dynamics receded, the M&A market rebounded somewhat in 2024, with buyer interest strengthening and higher value deals being struck. However, there has still been less activity overall. Dealmakers have remained cautious amid economic uncertainty, concerns about inflation and monetary policy, and regulatory and geopolitical headwinds.

Buyers are therefore selecting acquisitions carefully – according to PwC’s 2024 Mid-Year Outlook report, the value of deals rose by 5 percent in the first half of 2024, compared to 2023, though the overall number dropped 25 percent.

With M&A expected to become more popular again going forward, as companies seek growth opportunities to generate value and diversify themselves from the competition, dealmaking is likely to rise up the corporate agenda.

Heading for the exit

Given current market conditions, achieving a successful exit requires thoughtful and sustained planning to maximise a company’s chance of being ‘targeted’. Exit preparations in the early stages of a sales process can reduce potential risks and smooth proceedings. Sellers should set a clear timeline for exit – planning 3-5 years in advance can maximise value and ensure a smooth transition.

For would-be sellers, there are myriad considerations. According to some analysts, selling companies should utilise a two-stage M&A process. Stage one is the exit preparation phase, during which companies can ‘market’ a potential deal. Stage two is the more formal, structured exit process.

The key focus during the initial phase is the development of a well-structured exit plan, which may help the company for any formal M&A process it may undertake. The company should take steps to refine its position within the market and the way it presents itself to the outside world.

One of the most important steps when embarking on an exit is to formulate a clear, compelling strategic vision for the business. This helps buyers understand the long-term potential and synergies, highlighting aspects such as market expansion, innovation and competitive advantages. It also reduces uncertainty, builds confidence, and underscores the strategic fit and scope for value creation.

Also beneficial is for the seller to demonstrate consistent revenue growth, profitability and strong cash flow.  These factors showcase a company’s financial health and stability. They also reduce investment risk, increase confidence in future performance, and suggest a higher potential for return on investment, making the company more appealing to buyers.

Sellers may also focus on establishing a strong market position with a loyal customer base, to indicate reliable revenue and customer satisfaction. Similarly, being able to demonstrate competitive advantages that point to the company’s ability to outperform rivals, enhances buyer interest. Sustained profitability and growth potential shows dominance and stability.

Reducing dependency on a few key customers is also a worthwhile pursuit for sellers. Diversifying the customer base makes a company less risky and more appealing to buyers. The impact of losing any single customer is diminished, which enhances financial stability and predictability, and demonstrates broad market appeal and resilience.

Offering unique and innovative products or services can differentiate a company from its competitors and attract strategic buyers by showcasing potential for market disruption and growth. Unique offerings highlight creativity and the ability to meet unmet needs. Buyers are attracted to targets that offer a competitive edge and a means to expand their portfolio and drive innovation.

Additionally, having a capable, experienced management team reassures buyers about the company’s future performance and stability. Experienced managers bring valuable industry knowledge and proven track records. With good leadership, the target has a better chance of maintaining its growth trajectory, innovating and adapting to market changes.

Having scalable operations that can support future growth is attractive to buyers interested in expansion. Scalability indicates the company can handle increased demand without significant additional costs. Operational efficiency and potential for higher returns indicates a seller’s prospects for expansion.

Sellers should also take steps to protect and leverage their intellectual property (IP), such as patents and trademarks. These assets enhance a company’s value by safeguarding unique innovations and brand identity. Strong IP portfolios attract buyers seeking unique, competitive assets, guaranteeing a market edge and potential revenue streams, and enhancing the company’s reputation.

Another detail for sellers to consider is implementing strong environmental, social and governance (ESG) practices. Doing so can boost a company’s reputation by demonstrating a commitment to sustainability, ethical behaviour and responsible management. Strong ESG practices attract buyers focused on sustainable investments and social responsibility. This can lead to better risk management, increased operational efficiency and improved stakeholder relationships.

Putting the house in order

For companies hoping to maximise their exit, selling when the company is flourishing and drawing interest is crucial. Treating an acquisition with the same urgency as a milestone product launch can help.

Sellers should conduct a strategic review to optimise their portfolio, which may include divesting non-performing or non-core business segments.

Understanding the nature of the deal is also important. Shareholders may seek either cash, shares of the buyer’s stock, or a combination of both in exchange for their interest. In some instances, they may wish to sell their entire stake in the company, while in others, they may prefer to sell only a portion. These considerations will affect how a deal is structured and negotiated.

In a changeable global economy, sellers should also consider alternative deal structures. Partnerships, alliances, earn outs and other forms of capital structuring may be beneficial.

Sellers also need to get their house in order. Pre-sale preparation includes establishing a strong alignment between documents and supporting data, such as historical and projected financial information. Accurate financial records – free of hidden liabilities or discrepancies – foster trust and understanding between the parties, which can smooth out the due diligence process. They also highlight the seller’s commitment to governance and accountability, improving buyer confidence and making the deal less complicated.

Areas such as corporate governance, tax, intellectual property and litigation, among others, will be examined by would-be acquirers during due diligence. Ensuring that due diligence does not reveal any nasty surprises goes a long way to ensuring a smooth deal process. Business records should be available and easy to retrieve, with electronic versions for a virtual data room.

Buyer identification

By highlighting successes, companies can attract a group of genuine potential buyers, and proactively address deal obstacles which may emerge. Thorough preparation in the initial stages helps sellers to negotiate with truly interested parties. This process starts with a seller calculating the true value of its business, including its tangible and intangible assets. Accurate valuation helps in setting a realistic selling price.

Identifying the right buyer is key. Rather than put all their eggs in one basket, most companies seek to identify several potential buyers. Various buyer groups will have different perceptions of the target’s operations and challenges, so the seller will need to articulate the full potential the acquisition offers. A prospective buyer should be able to move quickly, take a pragmatic approach to risk and offer a realistic price.

Finding a buyer that meets both the seller’s financial expectations and aligns with their strategic objectives is not always easy. A seller may look to strategic buyers operating in the same sector, which may see value in potential synergies and pay a premium for their competitor. Financial buyers, such as private equity firms, who are laser focused on financial returns and stability, are another option. Potential acquirers should be vetted and assessed, focusing on their financial strength, strategic compatibility and long-term goals.

Corporate finance advisers, especially those with a wide network, can assist in matching sellers with potential buyers. They can also manage valuation expectations, among other contributions.

Sellers should retain the services of legal and financial advisers to negotiate terms that fit their broad objectives. Financial advisers can help with strategic planning by formulating strategies, articulating value drivers and managing risks. They also play a key role in deal structuring and negotiation, ensuring that terms are consistent with the seller’s goals. They can offer insights on market and industry trends. During due diligence, they can verify that financial information is correct and up to date. Beyond the more technical aspects of leveraging their experience and networks to improve the seller’s prospects, corporate finance advisers can also be a source of practical and moral support.

After the exploration phase of any potential deal concludes, parties can become more focused on a viable transaction. Would-be acquirers will be invited to submit formal offers, enter structured due diligence and work toward closing the deal.

When negotiating terms, sellers will, first and foremost, seek to secure a fair purchase price that reflects the true value of the business. Other areas of interest include deal structure, such as payment terms and earn-out provisions, which feature heavily in determining tax liabilities and outlining transaction risks. Effort should be applied to negotiating seller-friendly terms and conditions, where possible, to minimise liability.

If the seller intends to retain some level of involvement in the business post-sale, strategic alignment with the buyer’s vision will be vital. In such circumstances, the seller will need to negotiate the terms of their future role, compensation and the need for any non-compete clauses, to avoid the parties clashing over these issues down the line.

Additionally, the seller will want to understand the financial stability of the buyer, as well as any potential regulatory hurdles the transaction may encounter, to plan for risks. These discussions should form part of the pre-sale due diligence phase. In this way, the seller can identify and address potential issues in advance, strengthen its negotiating position and get ahead of looming obstacles.

Role of leadership

It is vital that the company’s leadership team is aligned. Management of the exit must come from the top down. Throughout the M&A process, the C-suite, and the chief executive in particular, must take a central role.

Chief executives can help keep the deal on track by ordering regular reviews, and managing risk and expectations throughout the process. They must keep their duties to the company at the forefront of their minds, seek regular advice and keep a thorough record of decisions made and the rationale behind them.

An exit is not the same as a fundraising round and preparation for each process is quite different. For instance, during an exit, a five-year forecast holds less significance, whereas short-term projections are crucial for building buyer confidence. Hitting next quarter’s targets often creates more value than projecting five times revenue growth in the future. Chief executives should bear this in mind and set priorities accordingly.

In preparing for, negotiating and executing a successful M&A exit, chief executives should lean on both company representatives and external advisers. Within the company, they should build out a deal team who can develop an exit plan. This should clearly state objectives for the transaction and determine how best to structure the deal to achieve them.

It is prudent for sellers to form a deal team – comprising professionals from finance, legal, operations and human resources – who can take the lead in several key areas. For complex and time-sensitive transactions, they can ensure workflows are followed correctly so tasks are completed on time. The team can conduct risk and liability assessments, as well as meet regulatory compliance obligations and safeguard the seller’s interests. Further, team members can offer their own perspectives to assist the negotiation process and push toward favourable terms for the seller.

Primed

The global M&A market is beginning to recover, particularly in areas such as advanced manufacturing, healthcare and life sciences, and technology. Economic conditions and the exit environment change all the time, but by preparing for a deal thoroughly, a seller can achieve their goals. Timing is central to a successful exit process. Those hoping to exit need to be ready to clinch high-value M&A opportunities ahead.

© Financier Worldwide

BY

Richard Summerfield