Despite prevailing economic headwinds, first-time small and mid-cap sellers who diligently adhere to a well-structured approach to deal-making can still achieve exceptionally favourable exits.

The Quest for Quality in Global Deal-making

A confluence of factors, including rising interest rates, market volatility, and banking crises, has led to a notable downturn in deal-making across global markets. (c. 65% drop in public exit deal volumes, extended deal timelines, and a valuation multiple meltdown), all of which have resulted in an increased flight to quality in PE deals. PE firms want strong fundamentals and profitability, with technologies that scale, all at reasonable valuations. Sellers have yet to catch up, thinking that they can still close the deal with an unprofitable product that is burning their cash reserves.

Firms with strong fundamentals, strategic growth capabilities, and technologies that scale with limited cyber vulnerabilities continue to whet investor appetite; above all, buyers are looking for sophisticated sellers who can help minimize their tail risk.

Navigating the Seller's Conundrum: Strategies for Closing Deals on Favourable Terms

So now sellers face a conundrum. On one side, the seller wants to exit to minimize downside risk. On the other, well-capitalized buyers want to take advantage of the desire to exit and secure deals at the lowest price. Consider the following factors to help you close the deal at your price rather than the buyer's.

1. Is your firm really prepared for this?

M&A is a time-consuming, dynamic process that requires tremendous energy to be spent behind the scenes, with an average timeline of 5-6 months for average deal consummation. It is crucial to communicate and bring onboard key organizational decision makers. In addition, setting up a deal-specific senior leadership team with clear guidelines helps maintain pace and track progress. Having an external party help organize things well in advance can be very helpful.

2. Think like a buyer and stop them driving down the price

It is crucial to identify the deal-relevant items that need to be updated and fixed well in advance of going into an M&A process. A good vendor review 12-18 months in advance will give you a chance to fix critical issues, and even more crucially get everyone's messages aligned and documentation completed. We have seen companies with 17 or more products, where no senior executive gave the same on-target message twice (or called the products by similar names!). Make sure you have your checks and balances ticked before you embark on the M&A process.

3. Be prepared with a carve-out/integration plan if required

Nothing says "lower your price" like not being prepared for at least the basics of a carve-out or integration into a larger firm. This won't be applicable to all sellers but is crucial to those who face it.

4. Don't get defensive

We've seen plenty of examples where a CEO or CTO ties his or her ego to the current state of the product. Then the process becomes a school exam, rather than a deal. The executive becomes defensive, doesn't answer constructively, and destroys value in the transaction. Make sure that your sell-side team grills you in advance on how to answer the tricky questions that might stump or upset you.

Driving sucess

Amidst a global deal-making slump, sellers in the PE market must navigate a plethora of challenges to close deals at favourable prices. To increase their chances, sellers should adequately prepare their organization though allegiance with a well-versed advisor, align messaging and fix critical issues in advance with a vendor review, be ready with a carve-out/integration plan if necessary, and avoid the value-destructive tendency of getting overly defensive during the process to preserve deal value.

With adequate preparation and support, the buyer can gain a better understanding of the deal, gain confidence, and reduce downside risk. This puts you at an advantage over your competition and will help you get a better sale price.

Don't hesitate to contact us to learn more about how BearingPoint Capital can support you in selling part of or all your business.

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