My experience as a Corporate Development Director was with a product company, which was the foundation for my hands on integration experience. The complexity of the integration always revolved around such things as product registrations, sales and manufacturing continuity, and transition of management.
At Third Coast Capital Advisors, I’ve encountered various client business models, which has exposed me to different integration priorities. In recent months, I’ve been engaged with Haskell, a design-build firm based in Jacksonville, Florida that has acquired several services businesses. For specific insights on integrating a services business I turned to Brad Slappey, CFO of Haskell.
I’m talking about the valuation multiple on the company you think you’d like to acquire.
Several months back I was talking the owner of a company, one of my client’s acquisition targets, about valuation. The conversation was similar to one I’ve had many times. He felt that his company was worth 7x trailing twelve months operating income, or based on my best estimate, about 5.6x EBITDA which is on the high side for an industry that is seeing similar transactions in the range of 4-5x EBITDA. His rational was that the company, at about $15 million in revenue, was achieving 20% operating margins–he suggested that I go try to make that kind of profit in the stock market. He also indicated that there had been offers in the past that were south of 7x operating income, and he felt he could do better.
A couple of years ago, before joining Third Coast Capital, I was in the thick of due diligence as Corporate Development Director on a major international acquisition project. At the same time, I was traveling globally to facilitate strategic planning and trying to juggle other acquisition opportunities. I had a bandwidth problem, so I hired Larry Radowski from Integrated Project Management Company (IPM) to augment my team. IPM got up speed quickly and delivered on their expertise.
Naturally, when approaching this topic I thought of IPM. I asked Larry what three things he thought were the most critical in any integration project. His answer: alignment of the acquisition objectives, tradeoffs between operational efficiency and long-term growth, and application of a consistent, proven management process. I’d like to explore each of these in more detail below.
A few years back, in my role as Corporate Development Director, I found myself in the middle of the most contentious letter of intent negotiations of my career. The sellers didn’t want to disclose the deal to employees until closing and they were concerned that due diligence would result in leaks. So the sellers insisted on a very detailed letter of intent before launching into due diligence. I spent several months negotiating that LOI and spent nearly as much on legal fees as I would on a purchase agreement. It was a long and frustrating experience, and not an approach I would recommend. That was one negative experience of many positive experiences using the LOI as a mechanism to move acquisition negotiations forward.
I recently reflected on this topic with Laura Lo Bianco of Fennemore Craig (Top 3 Law firm in Phoenix). We would like to share with you what we view as a few best practices around drafting a LOI.
There are a myriad articles out there about choosing a sell-side M&A attorney, but very few that address the other side of the deal. Our middle-market acquisition clients and prospective clients run the gamut when it comes to M&A experience. For those that may be newer to M&A, I propose 5 tips to help you choose M&A counsel and ramp your acquisition program.
If you’re relatively new to acquisitions, you either have yet to discover the challenges you will face while managing your integration, or you’ve already discovered that integration can be downright difficult.
When preparing for an integration, one of the first questions you may ask yourself is, “who”?
- Who inside your company has plenty of downtime in their current role, or can take a hiatus from their job for 2 to 4 months or perhaps even longer to manage your integration project?
- Who do you trust to integrate the current acquisition, and to establish your integration playbook for the future, assuming you don’t want to reinvent the wheel every time you acquire and integrate a company?
- Who has managed complex projects, and is familiar with project management best practices?
- Who is senior enough to require performance of the integration team, while maintaining frequent and fluid communication with upper management?
- Who can manage the project objectively, without focusing too much on their own functional background?
Until recently, I viewed outsourced financial due diligence as a commodity type of service. In my prior role as a Corporate Development Director, budget was probably my biggest concern when it came to hiring an accounting firm to perform financial diligence. Firm reputation and experience are table steaks. And there’s so much inter-firm movement out there that you can find great resources with big 4 experience, but billed at smaller firm rates.
Then I was talking with a long-time acquaintance, Chris Dalton of BKD (formerly of Ernst & Young, and Grant Thornton), and he mentioned a relatively new development, something he calls, “diligence through data analytics.”
If you are anything like most of my buy-side clients, you typically handle IP diligence internally. This is partially because the middle market companies I work with often acquire businesses with minimal patented IP (though there are always other types of IP in a deal), but it is also due to the potentially high cost of outsourced legal diligence.
Welcome to our blog. At Third Coast Capital Advisors, we take pride in our focus on acquisition search and advisory services for our corporate clients. If you are a corporate executive with responsibility for acquisitions or if you are a professional service provider who works with companies that are pursuing growth through acquisition, then this blog should speak to you.
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