The acquisition landscape has changed — are you ready?

[Stefanie Dhanda is senior vice president at Boston-based Stonebridge Associates, LLC, a FINRA/SIPC registered investment bank.]

While acquisition activity among medium-sized companies is returning to near-normal levels, today’s transaction landscape has undergone epic changes. The dynamics have shifted as buyers aggressively hunt strategic acquisitions; they’re making more unsolicited offers, looking to close deals quickly, and scoping out attractive companies that can be acquired without a competitive process.

Corporate buyers, having streamlined costs and preserved profits during the downturn, are now sitting on balance sheets with ample amounts of cash. As the economic recovery continues its slow slog, growing through acquisition is often the fastest (and easiest) way to take profits to the next level. By identifying and acquiring innovative companies, strategic buyers are betting that the quicker (and ultimately less expensive) path to growth will be buying versus building.

Now that credit markets have loosened, private equity firms are roaring back into the market, anxious to put nearly $500 billion of excess capital to work. Like their corporate counterparts, private equity firms are thinking strategically by targeting specific industry sectors and players. An increasing number of firms are using partnerships with industry executives—professionals who bring hefty Rolodexes and a lot of knowledge and expertise―to source deals. And many firms are forming direct relationships with target prospects, hoping to strike deals via informal “fireside chats” rather than from a competitive auction created by an investment banker.

So what’s the problem?
Despite the swarm of buyers, owners are still reluctant to put their companies up for sale. According to a recent independent survey of 1,211 privately held businesses conducted by Pepperdine University, today’s business owners are worried about changing government regulations and taxes, economic uncertainty, and access to capital.

Concerns about lower valuations (among other things) have also kept many potential sellers on the sidelines. In fact, the Pepperdine survey reported that the top three reasons for transactions not closing were valuation gap (27.4%), lack of capital to finance the transaction (12.2%), and unreasonable seller demands (10.3%).

Those who do decide to sell are less likely to shop the company to the world, preferring instead to limit the process to one or two potential buyers. This enables them to simultaneously explore market appetite and avoid widespread negative publicity if the deal falls through.

Owners should be prepared for the preemptive offer
Most companies are not ready to be sold. Managers are too busy running the business, and getting ready requires time and money. The truth is, this process can be distracting and a drain on already overstretched resources. But the consequences of not being ready are even greater, costing time, money, and opportunity. In most cases, the investment required to get ready is insignificant compared to the loss in value you risk incurring if you’re not.

What should owners do to get ready?
Getting ready involves implementing best practice initiatives that not only improve ongoing operations but prepare the company to respond to an inquiry from a potential buyer. Critical first steps every owner should take include:

  1. Create an advisory board of people who have been there before. Do not attempt to go it alone―guidance from someone who has been through the sale process is essential.
  2. Obtain audited financial statements. As an investment banker, I can tell you that this is the number one due diligence issue that causes deals to crater.
  3. Use free or low-cost resources to review internal practices. Check local business schools and law schools for interns who can capably review contracts and prepare financial analyses.
  4. Implement internal operating best practices, such as detailed budgets, projections and comprehensive sales pipeline reports.
  5. Assess your team of service providers. Lawyers, accountants, bankers, internal staff—do they have transaction experience?
  6. Bring your advisors in as soon as possible. The negotiation begins as soon as a potential buyer calls.

With a market frothy with aggressive buyers, and sellers still tentative about selling, the acquisition process has moved to a buyer-initiated approach or a process that involves just a handful of potential acquirers. Owners, understanding the increased likelihood of receiving an unsolicited offer, should get prepared ahead of time. Why? Being ready allows a business owner to respond effectively, maximize valuation, and avoid a missed opportunity in this hyper-competitive deal environment.