Welcome to Alkali Insights: M&A Musings and Advice
In the capital markets, preparation is paramount. If you’re preparing to sell or considering a sale in the future, you need to engage an M&A advisor now. A skilled advisor helps you see your business through the lens of a buyer today, so you can make strategic operating decisions tomorrow. With planning and foresight, you’ll be ready when opportunity calls.
The Time Commitment
Most founders built their companies from nothing. They’re smart, resourceful, and accustomed to relying on their business instincts. As a result, many believe that those same instincts are all they need to successfully sell their companies. As a founder, I get it, but I don’t judge success as just closing a deal. There’s a reason why professional investors use investment banks, and founders should too.
The deal process is laborious, intricate, and time-consuming. Additionally, if a founder isn’t driving the process, they’re reacting to somebody else’s – all the while potentially losing shareholder value. Worse still, if they’re running the company while also trying to sell it – they may damage the company if they prioritize deal demands over operating decisions. In short, there simply isn’t enough time to effectively run a company while managing a sale process.
How much time does it take?
It’s true, founders know their companies inside and out. They know their products, services, people, and customers. To manage effectively, founders often devote 50+ hours a week keeping everything moving in the right direction. Meanwhile, building an optimal deal can be a full-time job for 6-12 months. Most M&A firms invest 1,500 hours to complete a deal over a 9-month cycle – averaging 38 hours per week in the process. Running a successful business takes endless time and unilateral focus – time and focus that a founder doesn’t have to also manage a sale.
Founders preparing a deal can expect to invest significant time:
- Documenting every financial detail from the last three years.
- Reviewing all vendor agreements for red flags.
- Verifying the accuracy and completeness of tax returns.
- Ensuring their financials are clean to improve their chances of realizing maximum value.
Simultaneously, someone needs to craft a buyer strategy. This transcends just responding to inbound inquiries. One of the largest mistakes a founder can make is to manage their exit by responding to inbound inquiries alone. Some do it to test the waters, while others believe it’s the best they can do. Founders often have little to no context to evaluate offers, understand pricing negotiation tactics, and determine buyer options. Without knowing if that single buyer presents the best opportunity for them and their company’s future, founders are essentially taking the buyer’s word that this is the best offer.
For an optimal result, founders must run a competitive process. This requires in-depth market knowledge, extensive research, and strategic pivots along the way — a time-consuming process.
What’s the worst that could happen?
The most experienced founders have sold a business or two in their lives. However, M&A takes a niche skill set with decades of mastery in understanding transaction finance, macro-economic market dynamics, and negotiation strategy. Without experience, founders can diminish their negotiating leverage or kill the deal if the buyer’s bid falls below their asking price.
According to the Harvard Business Review, 70-90% of M&A deals fail. If a founder-led sale falls through at the last minute, it’s worth considering the opportunity cost of spending a working year on something other than running their business.
For some companies, losing the full focus of their founder has major, long-lasting impacts. As fewer strategic decisions are made, human capital finds better opportunities, innovation languishes, and revenue is ultimately impacted.
Recovering from a failed deal and returning to a viable selling point can take upwards of18-24 months. By that time, market dynamics may have changed and the appetite for a company may not be what it once was. With an M&A advisor, founders can ensure both their deal and company have success moving into the next chapter.