There is no perfect buyer or seller in the marketplace, but how do you attract the best possible partner?
Every company that is active in the M&A market, whether you are a buyer or a seller, is interested in finding the “ideal” partner in a transaction. One of the earliest exercises in any M&A search conducted by Zweig Group is to define your search criteria. What types of companies and company traits would yield intriguing benefits through a merger or acquisition?
This conversation can revolve around different criteria, but usually centers around things like size (revenue and FTE), profitability, geography, service lines, and market sectors. Sometimes, even with outlandish and unreasonable expectations of the perfect suitor, companies interested in M&A will search endlessly for their “unicorn.” Some readers may have heard this term before, but a unicorn is essentially the perfect buyer/seller, a company that actually exists in the marketplace that matches all of your preferred criteria, and, most importantly, is actually willing to negotiate a fair purchase price.
The reason we refer to these as unicorns is simple – they do not exist, at least not for the price that you have in mind. The point that anyone who wants to be active in M&A needs to understand is there are always trade-offs made along the way. The “perfect” M&A partner for you – buyer or seller – who is also willing to negotiate a fair price, almost certainly does not exist in the AEC M&A market. Even if they do, the odds of you contacting them with advantageous timing are even slimmer.
So, this inevitably leads us to this question: If I can’t meet the perfect buyer or seller in the marketplace, how do I attract the absolute best possible partner in a merger or acquisition?
Here are a few ways that I have found effective in my work as an M&A advisor at Zweig Group:
- Build the right deal team. It is extremely common, especially with first-time buyers or sellers, to want to include everybody on the M&A deal team. They want all 15 principals and the kitchen sink to have an opportunity to be involved in the M&A process. While it is admirable to lead your firm with such inclusivity, we have found that it is best to limit the deal team to a select few (three to four) members of executive leadership (e.g. CEO, CFO, COO). You could potentially include one of the second tier/future leaders of the firm if desired, but there is no need for your entire leadership team to be intimately involved in the process. I speak more about this in No. 4 below, but a crowded deal team can only lead to mixed opinions and an inefficient decision-making process.
- Cast a wide net. It is essential to keep an open mind about what types of firms could benefit your organization in an acquisition. You need to define your criteria in a way that is not so specific that there are only 15 total companies on Earth that would qualify. Casting a wide net will give you more “swings at the plate” – statistically it will enhance your odds of speaking to the best possible partner in a transaction. In addition, there is only so much information about private companies (like the ones you are targeting) available online, so limiting yourself to a very narrow search may even prevent you from speaking to firms that do fit your criteria, it just wasn’t apparent online. Lastly, casting a wide net involves always building opportunistic relationships in the M&A world (e.g. companies, advisors, attorneys, etc.), as you never know when one of your connections will one day lead to a prime opportunity.
- Sell your firm and the future opportunity. This may seem obvious, but you would be surprised how often this gets lost as a priority over the course of M&A discussions. When you can identify a target who is willing to speak with you about buying or selling your firm, you need to nurture and value that opportunity from start to finish. The best possible acquisition opportunities are oftentimes successful companies that are not even looking to buy/sell, so their agreeing to speak with you should be viewed as nothing more than that – a single conversation. It is up to you to sell them on the specific benefits and synergies that you can offer to convince them that it makes sense to move the conversation forward. On the other hand – many buyers will be evaluating multiple firms for purchase, and most sellers will have multiple interested buyers – what are you doing to differentiate yourself from the competition?
- Be responsive and respectful of the other party’s time. There is an old saying – “time kills all deals” – and it could not be truer in M&A discussions. Make your search a daily priority and respond to all requests from advisors or the other party as quickly as possible. Create a sleek team and efficient decision-making process to push conversations forward quickly. If you need consensus and sign-off from more than a couple people before making a decision, the M&A process will be negatively affected. Taking too long (more than two weeks) to respond at any point has the potential to kill the deal. The other party will lose enthusiasm for the conversation quickly if they feel like the time and effort they are putting forth is not being reciprocated.
- Be flexible and willing to negotiate. Do not enter negotiations with a “my way or the highway” mindset. Have an open mind about how you can work together to build an offer that both sides are excited about. Has your team differentiated internally between terms that are “wants” and “needs” on the deal? Ask the other party what their expectations are. Ask about the specific terms they would like to see in the Indication of Interest or Letter of Intent. Work with an advisor who has experience working in the AEC industry so you can use industry-specific experience in assembling a term sheet. The important thing to remember at this late stage is that you will likely need to make trade-offs in negotiating a deal, but that is OK because you have properly vetted the opportunity and understand the many benefits that can come from this strategic partnership.
Whether you’re on the buy- or sell-side of a deal, Zweig Group’s full-scale mergers and acquisitions advisory team can help you find and evaluate candidates and then structure the transaction – managing the complicated process from conception to the closing table. Click here to learn more!
John Bray, CM&AA is an advisor with Zweig Group’s M&A and executive search teams.