In my experience, earnouts are often used where there is a gap in price between what a buyer is willing to pay and what a seller is willing to accept. In these cases, buyers and sellers can often have legitimate differing opinions as to the current and future value of the target company. Additionally, the metrics of the earnout often require the seller to deliver strong financial results in the future in order to justify the payments on the earnout.
Since our firm typically works with corporate clients in making strategic acquisitions, we have a unique perspective on the entire process, from initial contact through execution and integration. The following are some best practices that we have seen used effectively by our clients to garner employee support as they integrate an acquisition.
Preparing your company for sale doesn’t have to be an exhausting experience, but can be very critical to a successful transaction in the future. Whether you want to sell in one year or five years, good planning can smooth the process later. We find that planning can be focused in five key areas.
One of the decisions that an acquisitive company needs to make is choosing the size of the internal M&A team. Many companies opt for the larger teams who can fulfill all the possible requirements of deal planning, execution and integration. However, we have found that opting for a smaller, experienced team that pulls in resources on a project basis can be more advantageous. These teams take a project-driven approach and consist of a handful of core team members. In many cases, these smaller teams are better than the larger teams insofar as their project approach is better suited for inconsistent or unpredictable deal flow. However, the companies that use these smaller M&A teams need to have a good M&A playbook in place for transaction review, analysis, valuation, due-diligence and integration. Along with these requirements, there are particular challenges that arise in several essential areas.
Like any other business process, acquisitions do not have a set blueprint that outlines how the acquisition will be successful. Each deal is unique and because of this, the acquirers with the most successful deals tend to have the most specific and clear strategies. Not surprisingly, acquirers who use vague strategic rationales tend to have less success.
While M&A activity continues to expand in the current environment, we find that many companies are becoming increasingly frustrated in their inability to close strategic acquisitions. The reasons for this are varied, but a common theme is the continuing excess of buyers versus sellers and capital versus available transactions. Most of the companies that are actively “for sale”, are typically represented by an investment banker who is motivated and incented to deliver the highest price for their selling client. While many companies can justify a higher price with the synergies that may accrue to the buyer in a strategic acquisition, the time pressure and limited interaction with management that are typical in a competitive sale process, often sour corporate buyers from actively participating in these types of auctions.
When looking for a high quality company to acquire, it doesn’t take long to discover that is it primarily a seller’s market out there. For every business in your targeted industry worth owning, many more will turn out to be troubled, a poor fit or maybe both. Therefore, it is always worth spending the time to determine why a seller is selling.