Bisnow's Primer On Mergers and Acquisition Considerations

Baker Tilly partner Frank Walker leads his firm’s financial advisory services practice, leveraging more than 20 years of public accounting and private industry experience to provide transaction and CFO advisory services to a diverse range of clients and industries. When deciding who to consult for this guide to mergers and acquisitions (M&A), he stood out.

Bisnow: What are some common mergers and acquisitions objectives and current drivers of M&A activity?

Frank: The impetus to make acquisitions can vary tremendously; in general growth through acquisition can be a highly accretive way for investors to grow a business or portfolio—it also comes with its own set of risks. The way that returns are earned in a transaction can differ according to the type of buyer.

For strategic buyers, you often see their general thesis including objectives such as entering new and complementary markets, securing new customers and capabilities, defending market share by taking out a competitor or simply diversifying.

Private equity or financial buyers, on the other hand, are generally very efficient consolidators and drive value through efficiency, scale and integration.

In terms of drivers of M&A, there remain consistent catalysts such as low borrowing costs, strong balance sheets and elusive organic growth opportunities. Although organic growth can be a cheaper and lower risk path, it can take too long to execute, making acquisitions a convenient accelerator.

On the other side of the trade, that is, the sellers, many of the owners deciding to sell are of the Baby Boomer generation or at the stage when wealth preservation and succession objectives are paramount.

Overall, deal volume so far this year is down in all the published reports. Markets have been less active and perhaps a little hungover from the peak activity of the last two years. Buyers need a chance to digest and integrate much of what has been purchased over this period. However, I would expect, possibly post-election with a little more certainty for buyers, that transaction volume will pick back up.

Bisnow: Do you see more deals being struck with strategic or financial buyers? How do their approaches differ (e.g., keeping current leadership in place)?

Frank: The mix of buyers seems to be about the same. About 80% of the transaction volume in the US is strategic, while the remaining 20% is private equity-sponsored in the middle market.

The private equity buyers tend to be more cyclical and aligned with their fundraising life cycles; however, they are also likely to grow proportionately along with the asset class. Generally, we see both pursuing deals at a healthy rate.

In terms of approach, it largely depends on why they are acquiring the business. If the thesis is to obtain entry into a new market, management retention may be required; whereas if it is buying access to a customer base, it is less likely that executive management is needed. A financial buyer typically needs management to stay in place and will be more selective about changing out the team, at least initially. But every deal has its own unique profile.

Bisnow: Do you see drastically different multiples in different industries and sectors?

Frank: The answer is yes. Multiples can be a tricky thing to reference, as they are a simplistic measurement that often is the result of very unique factors to a particular investment or business. But it is fair to say that multiples are generally a function of future cash flows and risk, which varies by industry and subsegments.

For example, real estate and cap rates are certainly too broad a brush as everyone knows, but as you drill further into asset classes, such as multifamily and commercial, you start to better understand the opportunities and risks that drive valuation multiples.

It's really not that different in other industries. Take government contracting, for example. Why does a general technology services firm trade for a different multiple when compared to an information security business with cleared personnel that allows them to be close to a government mission? Growth, future cash flow opportunity and relative risk all influence the number.

Bisnow: How often are investment banks and M&A advisory involved?

Frank: Often. If you are serious about selling your business, sellers are smart to engage a quality investment bank, especially when sellers are seeking a competitive process. Bankers generally have the knowledge of the market participants that enable them to run an efficient and regimented marketing process.

Bisnow: How long does due diligence take?

Frank: The time it takes for due diligence depends on many different factors. Transaction complexity, seller sophistication, unforeseen issues, and access to information and management all play a hand in the efficiency of the diligence process. Every day, we are increasingly being engaged to assist sellers and their investment banks in executing on financial due diligence including the issuance of sell side due diligence reports.

In terms of timing, we tend to see deals transact within 90 days of entering into a letter of intent. But much of this falls on how prepared the seller is for the process. Preparation is one thing a seller can control, and it isn’t to be taken lightly. Experienced deal people often say “time is the enemy of all transactions.” In general, speed and completion are highly correlated.

Bisnow: What about the maturity of companies? Are they seedlings or established?

Frank: We see both, but much more skewed toward the more mature business. The seedlings you refer to are usually being purchased because they have something really unique that a larger company can exploit. Many times they are technology and/or intellectual property purchases. These earlier stage transactions tend to require a lot of handholding due to the maturity of the business and depth of management.

Bisnow: What are some factors to consider when evaluating whether a company's ready to go to market?

Frank: I advise companies to assemble a team of seasoned accountants, lawyers and bankers with significant transaction experience well in advance. The buildup to a sale isn’t a duration measured in months—it can take a year or more. 

In its simplest form, sellers who have happy and growing client bases, served by competent managers that are able to reliably predict future performance, are the best candidates to transact. This profile is usually less prone to the biggest deal killer—surprises.

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