New Report Shows Selling Opportunities In Mid-Market M&A Abound, Despite Dip In North American Deal Activity

Mid-Market M&A: Deal Environment for Sellers

North America has seen a dip in deal activity this year, with volume and valuations down. How can sellers cope with the vagaries of the current M&A environment? Four experienced mid-market dealmakers weigh in.

• As volatility continues on world markets in mid-2016, North American mid-market M&A has hit a downturn. In the first five months of the year, the value of mid-market deals in the region sunk 10% year-over-year to US$56.9bn, while volume fell even more sharply, to 655 deals from 896. After several years in which sellers could dictate terms, it has become a buyer’s market in many sectors.
• And yet, selling opportunities will continue to arise. The question for sellers is: How can a company best position itself for sale in this environment?
• In our expert roundtable, four top dealmakers detail the key steps business owners should take to optimize value. They also describe approaches for handling activist shareholders; the advantages of strategic vs. private equity buyers; and the qualities in a buyer that sellers should focus on most.
• In the end, valuation is king when it comes time to sell. But achieving that optimal deal value – and closing the deal quickly – require a well-informed plan of attack.

Mergermarket (MM): Early 2016 has been a buyer’s market in many sectors, especially those such as Energy and Mining. Given this environment, what are the key steps for midmarket companies to take in order to receive optimal value in a sale?

Mary Ann Travers (MAT): Private company sellers need to make sure they’re putting their best foot forward. Part of that entails analyzing their operating expense bases and preparing financial statements that reflect their company’s operations in a favorable light. They should remove non-operating expenses; identify off-balance-sheet items; and make sure that their headcount is optimal, although not too lean, since they want to achieve their forecasts. When preparing their forecasts, they should make sure that they’re capturing growth opportunities and that they have supporting documentation to back up their assumptions.

Sell-side due diligence really helps mid-market companies get ready for sale as well. In our practice, we walk them through the kinds of things they need to do to clean up their operations and to be mindful of as they prepare their forecasts. For instance, many privately held, smaller mid-market companies have non-operating items and extraneous expenses that don’t truly contribute to the business operations, which is just a function of the nature of a private company. When they look to sell, they should make sure those things are cleared away.

Michael Teplitsky (MT): This year did kick off with a bad start for many sellers. Many of the businesses that Wynnchurch pursued saw reductions in backlog and unfavorable customer-demand trends. To make matters worse, the debt capital markets significantly deteriorated in the first quarter. The sub-industries under the most pressure were, of course, Metals, Mining, and Energy. To maximize shareholder value in this soft economic environment, sellers of mid-market companies must convince buyers that their company is differentiated and defensible; that there are attractive growth opportunities (such as tuck-in acquisition targets) available in the short and medium-term; and that the company generates attractive levels of cash flow. Sometimes, maximizing value may require the seller to take contingent consideration, such as an earn-out or an equity roll-over.

Companies should also make sure that the right management team is in place to achieve their growth potential. The shareholders should form an interdisciplinary advisory team to get optimal advice before a sale process starts. They should consider including one of each of the following: wealth manager, attorney, accountant, M&A advisor, commercial lender, operational consultant, market consultant, and board member or senior industry advisor. Also, having preemptive conversations, also known as “fireside chats” or “gold card meetings, ” with potential strategic or PE buyers may be a catalyst for identifying a “unicorn buyer” (i.e., an outlier high bid) without having to run a large auction, which may distract management from core business operations. UBS Investment Bank smartly deployed this strategy in the recent sale of Wynnchurch’s Wolverine Advanced Materials to ITT Corporation for US$300m.

Jeff Cleveland (JC): As head of D.A. Davidson & Co.’s Food, Beverage & Agriculture investment banking practice, I spend most of my time working with clients in the food and beverage, and more broadly, consumer markets. In these segments of the economy, it is still very much a seller’s market. Given the themes reshaping these industries and the limited supply of high-quality investment opportunities, relative to the demand for investment, we don’t see this changing in the near-term.

Nonetheless, we counsel all of our clients to take deliberate steps to properly prepare in advance of a transaction in order to optimize results. Ideally, owners and executives are networking with key intermediaries (attorneys, accountants, lenders, investment bankers, etc.) years before they launch a marketing process to seek outside capital. These conversations should allow owners and executives to better understand how outside investors will view their business.

Generally speaking, areas of focus tend to include business operations, customer and supplier relationships, market dynamics and growth opportunities, and facilities and equipment. Assessing and adjusting a business around these key areas can facilitate meaningful value creation by the time shareholders execute a sale.

Fundamentally, this sort of preparation is simply about building a better business for the longterm. Investors will take note of these sorts of improvements, above most things.

Jim Kofman (JK): I always tell clients: There is no such thing as a general market approach when it comes to achieving the best valuation for your business. It is entirely sector- and geographydriven. What might make sense today in gold and silver is entirely different than what might be right for copper, and what is logical in Mining is entirely different than in Healthcare. Timing is also key – what makes sense today is different than it was six months ago. So it is really about understanding the individual industry and the food chain in that industry – who the buyers are and who needs what at any given time.

The type of sale process is important as well. Many people assume that the best way to get value is to run a broad auction and create tension. But there are lots of buyers out there who don’t want to spend the time and money to go through

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