But why should so much of the focus, and the media hoopla, be geared to the buyer. What about the seller? Almost everybody is going to want to 'sell' at some point, in one way or another - whether it involves an outright sale to a third party, or a gradual liquidation of a personal holding in a larger firm. Selling doesn't necessarily imply hiring an investment banker and going through a full-fledged auction process to find the highest bidder. It may mean figuring out the right time to sell a publicly traded stock, or it may mean positioning a smaller private firm for gradual internal transfer of ownership to younger leaders of the firm. You may want to sell now, or you may want to sell in ten years, but a key question is - 'what can you do to insure that you eventually recognize your value, and that your deal will be one of the successful ones?'
Here at TEBS, we track various environmental company performance and valuation data, and we have carefully watched the M&A trends over the years. As we have pointed out in the past, too many deals don't really work out. Some deals go well, but far too many buyers and sellers wish they would never have spent the time and effort that they did in consummating a deal. So, what can the seller do, in anticipation of a possible sale - now or in the more distant future - to insure the greatest likelihood of a successful transaction? Below, we discuss some of the lessons that seem to come up repeatedly in transactions in the environmental and engineering industry.
1) Think Every Day About Ways to Maximize Your Value: Whether you intend to sell now or in twenty years, whether you plan a gradual internal transfer or an outright sale, or even if you have no plan to ever sell your company, you should always build and run your company to maximize value. The CEO of the large public company always has as his primary goal the maximization of shareholder value, and so should you, regardless of your size or future plans. Maximizing value means things like:
§ generating strong and consistent financial performance
§ building a strong and sustainable client base
§ building differentiating factors - proprietary and competitive advantages
§ maintaining a strong focus on the core business - 'sticking to your knitting' even as you investigate possible diversification into new areas
§ building and maintaining a strong reputation in the marketplace
§ building a strong and experienced management team and staff.
2) Decide When the Time is Right: Its not easy to decide when it is the right time to sell, or what the right deal may be. The process can be helped by careful planning, but more often than not, a lot of it is fortunate timing and the ability to take advantage of opportunities when they spring up - like the old saying 'its better to be lucky than to be smart.' Even though perhaps you were not really thinking about selling the company for another five years, what if the perfect buyer comes along next year? Will you be able to react? One has to be ready to take advantage of opportunities when they arise.
In almost any firm, the decision to sell can be a very emotional and disruptive one. Sometimes, the older principals may have a stronger desire to sell - and to be able to liquidate their investment - as they see their retirement years beginning to loom on the horizon. The younger staff, on the other hand, may see a twenty or thirty year career stretching out in front of them, and the thought of a sale can be disagreeable or threatening. This kind of intergenerational friction and stress has literally torn apart many privately owned firms. One way to avoid this kind of stress is to have some sort of plan in place, to gradually transition ownership if that is appropriate, and to keep all employees informed, at the appropriate time, about a possible ownership transition.
3) Decide What You Want in a Deal: As you start to think about selling - even if you're not really ready today - start to mentally develop a profile of the right buyer; maybe even make a list of preferred 'suitors' should you someday to consider selling. What type of variables will really be the most important to you? Obviously, the right deal will require a combination of many things, but try to mentally rank the key attributes:
§ up-front price - dollars today vs. dollars down the road for your shareholders
§ deal structure alternatives - cash vs. stock, etc.
§ management continuity - will your team stay in place, or will there be significant management upheaval and change?
§ independence of operations - will you be a separate unit of the company, or will you be fully integrated?
§ opportunities for the younger staff - how much better will they be?
4) Carefully Evaluate Any Specific Potential Partner/Buyer: This may seem pretty obvious, but once you've started to 'dance' with a specific partner (or more) that seems to offer the right fit, make sure you thoroughly investigate them. Ask the difficult questions - are they financially capable? What is their general management style - who will report to who? How is your firm going to fit in to the bigger picture - will you be a separate group, or will you be folded into an existing organization? Insist on talking to the firms that they have acquired in the past, and see how they liked becoming part of the buying firm. What is their track record in terms of successfully integrating acquisitions? It's your company that you are selling, and now is no time to be bashful - make sure you are pushy enough to get all the answers want.
5) Start Building a Good Relationship with the Buyer: As you get further into the courting and negotiating stage of the relationship, in a sense you start to serve two masters; on the one hand, it is still your firm, but you are in the process of starting to 'belong to' someone else too. It is critical, right from the start, to build an honest and forthright relationship with the potential new owner. More deals collapse because of mistrust between the parties than for any other reason. Be honest about your pros and your cons - nobody is perfect, and being honest about your problems and your deal requirements will make the right buyer trust you more, helping to form the basis for a better relationship. In short, spend plenty of time making sure that the cultural fit - the 'chemistry' - is right, whether that means more meetings, lots of dinners, lots of golf or whatever it takes. Many companies hover around in this stage of the relationship for a year, two years, or more before they finally decide if it 'feels right.' There are too many people out there who have sold their companies - and maybe even made a lot of money - who wish they never would have done so. Make sure you're not going to be one of those.
6) Hire the Right Help: You may want to hire outside advisors, to help make the process go smoother. Unless you are a fairly large and diverse company, you may not have the resources internally that you really need to help identify, negotiate and close a successful transaction. You'll probably need an attorney, particularly towards the end of the process, as you negotiate the details of a final purchase agreement. An investment banker or intermediary can help you craft the appropriate strategy and assist in identifying and connecting with the right types of buyers - for example, do you hang out a 'for sale' sign, do you go after a specific buyer, or do you develop a more subtle approach? What are the pros and cons of being direct or being more coy about the process? An advisor can also be a useful 'buffer' between you and the buyer, as you start to talk through the sensitive things like the price, management roles, and so on - and you usually don't have to pay the advisor much until the deal is successfully closed.
7) Structure the Deal to Benefit You: There's more to a deal than the final price - the way the deal is structured can be critically important too. Both stock and asset deals are common in the environmental industry, and the deal may involve payments to you in the form of cash, debt or stock - or some combination of all three. The financial structure of a deal can become exceedingly complex; however, creativity and different approaches using these three key elements may allow both you and the buyer to be comfortable with the deal:
§ most sellers like to receive cash when they sell their company. Once a cash payment is in hand, the deal is done - you have removed any of the future concerns or worries that may come along with accepting a note from the buyer or taking a stock position in the buyer's company. Some cash is better than no cash, and likewise, cash now is preferable to cash in the future. 'Earn-outs,' or cash payments over time, are often used to bridge the gap between buyer and seller expectations of the future, but as a seller, remember - once the deal is complete, you may not have full decision-making authority, and hence the ability to control future performance.
§ in a cash-constrained business like this one, payment with borrowed money is very common; there are a number of different types of debt, and various ways of structuring it - these issues can be important aspects of your deal.
§ larger buyers (particularly public firms) may use their stock as the currency in an acquisition. Do you want to become a shareholder in the new firm? The desirability of payment in stock is related to the likelihood that it will move up over time, and that it offers sufficient liquidity - i.e., that you will be able to successfully sell it if you decide you want to.
8) Negotiate Hard - Stand Up for Your Rights: Now is the critical time - have in mind a detailed negotiating plan and strategy when you finally sit down to hammer things out with the buyer. Make sure you know what you would like to achieve, but also what you would be willing to settle for; know where you can give a little, and where you can't. Understand that the party on the other side of the table is going to be thinking the same way. Hopefully, by now you have built up a strong personal relationship with key leaders of the acquiring company, but don't let that stand in the way of pushing hard for what you want to accomplish in the transaction. Standing up for your case, and being able to articulately defend it, will probably strengthen your relationship with the buyer in the future, even though you may have differing viewpoints or objectives at this stage of the discussion.
9) Start Working Together Early to Integrate the Two Firms: At the same time as you are starting to finalize the terms of the deal, it is important to be thinking ahead about how the two firms will fit together. Identifying, evaluating and consummating the deal only represents the first part of the job in terms of actually implementing a successful deal - many veteran acquirers say that the real begins after the deal closes. The chances are that you are going to want, or that you may be required by the terms of the deal, to stay an active part of the leadership of the combined firm for at least some period of time. How well the combined firm performs may determine the earn-out which you and your fellow shareholders receive. In short, you and your new partners need to have a commitment and a detailed plan to make the two organizations fit together, or the whole exercise may not succeed.
Many transactions are supported by a logical and well thought-out strategy, but haven't been successful because not enough time and attention was spent on the critical aspects of post-deal integration planning, assimilation and communication. And there is a big difference between the strategic vision developed at the executive management level, and the challenges of translating that vision into a workable operating plan on a day-to-day basis in the trenches. An effective integration process checklist includes:
§ having a well thought-out plan for the integration process: As the deal starts to look likely, you and the buyers should begin to put in place a thorough plan for the integration process, and a team to manage it.
§ paying close attention to cultural and personnel issues. This should go without saying - yet, many buyers fail to properly understand obvious cultural problems and fail to keep (both their and your) employees properly informed about organizational plans and potential personnel changes.
§ maintaining timely and honest communications at all times. Experience has shown that it is the uncertainty surrounding mergers and acquisitions that people have the most difficulty living with. Most people can adjust to even wrenching changes if they at least know what is happening - it is often just the uncertainty and the feeling of not being involved that drives key employees to leave, and which in turn may threaten the success of the deal.
10) Stay Committed to the New Firm: Selling your company, and partnering up with a new group, is not usually the end of the story. Even if you don't plan to be part of the new combined firm over the long term, you're probably going to stick around for a while. You may, as mentioned above, have an earn-out which may be a substantial percentage of your overall payment, and hence you will have a strong interest in influencing the course of the new company. The purchase agreement probably required you to sign a non-compete agreement. And most importantly, the buyer probably wants you to stay in place for a while. Most buyers aren't really interested in purchasing firms where the top management wants to disappear on their sailboats to the Bahamas the next day; this is a personal services business, and the buyer wants the experience and expertise which you and your colleagues offer - that's what they bought.
In summary, although many deals haven't worked, that doesn't have to mean that yours can't. Be prepared, think and plan ahead, but also be agile and flexible, and make sure that this decision - probably one of the most critical of your life - will have the maximum opportunity to succeed. Sure, sometimes it may be better to be lucky than to be smart, but perhaps the more insightful maxim for successfully transitioning your firm is the following - 'good luck happens when preparedness meets opportunity.'