M&A: The Road Ahead 2023
By Tom Zucker, President
The M&A markets continue to be robust and vibrant. The impact of COVID-19, supply chain disruptions, skilled labor challenges, and other such events over the past 24 months has not deterred the vibrancy of the deal market. Despite these challenges, the past 18 months have been the most prolific deal market in modern history. Truly an amazing testimony to the power of the free-market system and capitalism.
As always, looking forward is always cloudier than looking back. Optimists will proclaim sunshine and pessimists will claim doomsday is arriving. But it’s more complex than that.
During a recent lunch with a bank President, he described his customers’ financial performance as a ‘tale of two cities’. He said that most of his customers are thriving and performing well above covenant levels. He contended that the business fundamentals underlying their businesses are strong and stable for the near future. The optimist in me was overjoyed.
However, he also said that several business sectors are seeing enormous headwinds and turmoil ahead. At first, I thought this was just the familiar pre-recessionary cycle that impacts some sectors and businesses earlier than others. Upon further dialog and reflection however, we concluded that this recessionary period might be different. We identified several factors that are worthy of consideration when planning your company’s path forward:
- Ample Capital: Banks and private equity firms are well capitalized. This will enable banks to maintain leverage rates, and financial buyers to keep valuations strong for good companies.
- Rising Interest Rates: The swords that tame inflation are higher interest rates and controlled spending. The Fed has begun raising interest rates, but don’t count on controlled spending before the midterm elections. The early 80’s recessionary playbook needs to be dusted off quickly.
- Policy – More Political: Governmental decisions are being based on political views rather than on sound judgement. Pay attention to the impact of this pendulum.
- Inflation’s Impact: The strong survive and thrive during periods of higher inflation, and the weak die. Are you the strong? Will your multiple pricing increases be accepted? Will your margins expand, hold or contract over the next 12-24 months? These are questions that you and your leadership team must confront with honesty and objectivity in order to take preemptive action.
The M&A road ahead will offer opportunity. The ability to identify quality businesses and assets to bolster a growing business and add capabilities to your company’s offerings will be plentiful. The well-capitalized banks and financial sponsors will be ready to embrace your well-planned growth journey. The vast amounts of money supporting the financial buyers (i. e. private equity) is unprecedented and will continue to be a driving factor supporting a growing volume of M&A transactions over the next decade.
We expect the investment periods of these funds to have a significant impact on which sectors will be attractive during the upcoming years. During a recent ACG event, it was widely accepted that some sectors (e. g. building products) will be challenged to get premium valuations during the next few years. We believe that M&A transactions in these sectors will continue to occur, but valuations will be tempered for the risk perceived by lenders and buyers.
The vibrancy of the American economy and the free-market system will continue to produce economic opportunity for many business owners. But success is not guaranteed… Travel wisely.
© Copyrighted by Tom Zucker, President of EdgePoint Capital, merger & acquisition advisors. Tom can be reached at 216-342-5858 or on the web at www.edgepoint.com
Art of M&A Communication
By Tom Zucker, President
One of the biggest hurdles an owner experiences is notifying family, customers, and other business stakeholders that they have decided to sell their business. The fear of their response to the message is often worse than the conversation. After years of guiding business owners through these discussions, here are a few of our observations and suggestions.
Control the Message
The timing of disclosing ownership’s desire to sell is complex. Deal makers often refer to the notification process as “bringing them under the tent”. In general, notifying employees on a need-to-know basis reduces deal risk. Sellers typically notify the President, Controller/ CFO and Operations Managers first given their awareness of the business and the need to have an active role with potential buyers. It is quite common that the majority of the employees are notified shortly after the transaction closing.
Make it Personal
The famous quote from the Godfather, “It’s not personal, it’s strictly business” does not apply when communicating your intent to transition your business. The message and tone need to be very personal and filled with gratitude and appreciation. Personally thanking key employees and assuring them that their roles and responsibilities will continue is especially important to the seller, buyer and the employee. These messages are often emotional and sometimes involve “thank you checks” being issued to tenured employees. It is important to be available for these discussions to help with the closure of your tenure as owner and leader of the business.
Key customers and suppliers value the same personal approach. Buyers will request to confirm the relationships intent to continue buying from the company prior to closing. This communication is extremely sensitive and must be approached with great thought and consideration. Owners should resist the urge to over communicate with customers. We have seen times where an owner overly communicates with customers which leads to uncertainty and increasing the risk that the customer considers alternative suppliers. A seller needs to know when less is more.
The choice of media and timing should be as personal and respectful as practicable, tailored to each group’s circumstances and needs. Owners should also consider following up their verbal notification with a clear and concise letter reiterating the key points.
Anticipate Their Response
Each stakeholder of the company will respond differently to your message. While most people will positively respond to the news of your business sale, not everyone will respond in a rational or positive manner. The ability to anticipate one’s response requires awareness and emotional intelligence. We all know the characteristics of the person that will be distraught, upset, or overly emotional about your decision. Plan your communication with these people carefully and thoughtfully.
The journey of selling your business is an exciting time filled with excitement, joy and hard work. The ability to successfully communicate to your business’s key stakeholders is essential to a successful outcome. Identifying key advisors skilled at the Art of M&A Communication will increase the likelihood of a successful outcome and less sleepless nights.
To learn more about the 4 C’s of Transition Planning visit: The Seller Experience: Preparing the Owner for Transition
© Copyrighted by Tom Zucker, President of EdgePoint Capital, merger & acquisition advisors. Tom can be reached at 216-342-5858 or on the web at www.edgepoint.com.
EdgePoint Announced as Winner at The 13th Annual International…
June 7, 2022
(Cleveland, OH) – The M&A Advisor announced the winners of The 13th Annual International M&A Awards. EdgePoint was named a winner for Consumer Staples Deal of the Year for the acquisition of Real Food Blends by Nutricia, part of Danone S.A. The awards will be presented at a Black-Tie Gala on Wednesday, September 21, 2022, in New York City.
“Since 2009, we have been honoring the leading international M&A transactions, companies, and dealmakers. EdgePoint was chosen from over 250 participating companies to receive the award. It gives us great pleasure to recognize EdgePoint and bestow upon them our highest honor for international M&A firms and professionals,” said Roger Aguinaldo, Founder and CEO of The M&A Advisor. “EdgePoint represents the best of the international M&A industry in 2021 and earned these honors by standing out in a group of very impressive candidates.”
EdgePoint served as the exclusive financial advisor to Real Food Blends. Steve Tardio, Managing Director, EdgePoint Consumer Group, said, “This family business was on a mission to provide wholesome food to all who use a feeding tube. Our global review of companies that could take this business to its destiny, ranked Nutricia, a part of Danone, SA, highly. Because we have known them for years, we were able to negotiate to closing on Zoom during the pandemic.”
The Awards Gala is a feature of the 2022 Leadership in Dealmaking Summit. The Summit will take place on September 20-21, 2022 and will feature over 350 of the industry’s leading professionals participating in exclusive interactive forums, sessions, roundtable discussions, one-on-one meetings and a solutions provider showcase led by a faculty of international M&A and cross-border industry stalwarts and business media experts.
THE M&A ADVISOR
Now in its 24th year, The M&A Advisor was founded to offer insights and intelligence on mergers and acquisitions, establishing the industry’s leading media outlet in 1998. Today, the firm is recognized as the world’s premier leadership organization for mergers & acquisition, restructuring and corporate finance professionals, delivering a range of integrated services from offices in New York and London. www.maadvisor.com.
About EdgePoint
EdgePoint, a leading national investment banking firm, is focused on providing middle market businesses with merger and acquisition advisory services. For more information, please visit www.edgepoint.com.
