Position Your Business for a Premium Valuation and Superior Deal Terms
Key Takeaways
- Business owners should evaluate buyer quality, strategic fit and timing prior to embarking on negotiated M&A transactions.
- Private companies can help improve business valuation by proactively addressing risk elements, vetting valuation assumptions and deal structures.
- An experienced M&A advisor team can help manage negotiations, maximize deal terms and increase certainty of closing.
With M&A activity accelerating across industries, many private company owners are receiving interest from strategic buyers, private equity firms and their agents. While this attention signals opportunity, it also presents some level of uncertainty: financial investors are increasingly deploying sophisticated sourcing platforms to identify business owners and pursue acquisitions at prices below true market value. Understanding these dynamics — and how to navigate them — is critical to achieving strong valuations and favorable deal terms.
A negotiated deal occurs when an acquirer and seller engage directly and privately to negotiate and agree on the terms of an acquisition, without the target company being marketed to multiple prospective buyers.
Don’t Go It Alone
As business owners are driven by seizing opportunities, it could be tempting to pursue a specific acquirer. Even if you have sold a company before, however, it is rare that a business owner can maximize value and achieve superior deal terms on their own. Vetting a prospective acquirer and negotiating a life-changing transaction is a daunting task requiring deep experience and knowledge of deal dynamics.
When one or more potential suitors approach you – here are key considerations as you think about next steps.
- Buyer quality – Does the prospective acquirer have the ability to close the transaction efficiently? Will they renegotiate the deal? What does their internal transaction approval process look like and what are their funding requirements for the acquisition?
- Valuation – How does the proposed purchase price and deal structure (e.g., cash at closing, earn-out, seller note) compare to fair market value? What approach did the buyer use to determine their valuation range? Have you accurately calculated and supported your adjusted EBITDA? To what extent does the purchase price reflect the buyer’s expected synergies? Could another buyer potentially pay more for your business?
- Deal terms – In addition to purchase price considerations, what are the proposed terms for other important commercial provisions (e.g., indemnifications, escrow amounts and timeframes, non-compete agreements, post-sale employment, net working capital, etc.)? Are they in line with market benchmarks?
- Deal structure – Have you determined the optimal deal structure (e.g., stock vs. asset sale)? How can you mitigate the tax impact of the transaction? Have you considered any pre-sale personal tax planning?
- Risk elements – Have you identified and mitigated potential buyer concerns or issues? Risk elements, such as business mix, regulatory compliance, tax exposure, litigation and environmental considerations may jeopardize a transaction.
- Fit –What is the acquirer’s strategic rationale for pursuing this transaction and how does it align with their long-term goals? Is there a strong cultural fit between your organization and the buyer? How committed are they to preserving your legacy and what are their plans for retaining and supporting management and employees after closing?
- Timing – Is the timing for a deal appropriate considering specific industry dynamics, the company’s outlook as well as M&A activity and the state of the broader economy? What is your exit time horizon?
- Personal goals – What is your exit strategy (e.g., sell to a third party, transition to family or management buyout)? Have you determined the amount of capital you will need to retire comfortably? Do you have a continued desire to grow the business or is your focus on transitioning out?
- Internal team – Have you identified who within the organization to include in the process? Have you carefully considered the appropriate timing for informing key employees (e.g., the internal deal team, finance, operations, HR) to balance confidentiality with effective preparation?
- Advisor team – Have you assembled the right team of advisors, including an M&A firm, legal counsel, a tax specialist and financial planner? Who will quarterback the entire sale process, help you control the narrative, anticipate and resolve deal issues while you focus on running the business?
Why Partnering with an M&A Firm Strengthens Negotiated Deals
Simply put, the purpose of hiring an M&A advisor is to help you maximize value, secure the most favorable terms, achieve your non-financial objectives, complete the transaction efficiently and avoid becoming entangled in a process that ultimately fails to close.
An experienced advisor manages and orchestrates the entire deal cycle, guiding you through due diligence, negotiations and every step in between.
Here is how an experienced investment banking team adds meaningful value to a negotiated sale:
- Multiple deal options – An astute investment banking team can quickly identify and contact several other capable strategic acquirers, including those you are aware of and those you never knew existed.
- Negotiating abilities – While you may be skilled in negotiating transactions for running your business, the M&A advisor is better positioned to work on your deal and garner the highest value and best terms for your business.
- Buffer between you and acquirers – Staying focused to keep your business growing and profitable is crucial during the marketing and sale process. Further, selling a business can stir up a lot of emotion. It is best to let professionals take the lead in negotiating value, deal terms and critical issues with buyers and other professionals throughout the transaction.
- Early warning system – The right investment banking team is skilled in recognizing when the other party is not sincere or when the certainty of closing a deal is low. You do not want to waste time on a suitor who is displaying low odds of completing a successful deal.
- Guidance based on market trends and dynamics – Understanding current market value and terms is key to achieving a premium purchase price and deal terms. An effective team can identify and convey hidden value to buyers and calculate the appropriate adjusted EBITDA and other financial metrics to help you receive a premium to market benchmarks.
- Creativity and resourcefulness in resolving deal issues – Anticipating business issues that are likely to arise in due diligence and preparing management to address them will reduce the risk of a broken deal. Since few businesses have no shortcomings, challenging issues that arise either before or during due diligence often require investment banking creativity to resolve.
- Maximum deal control to your advantage – The deal journey can be formidable. Investment bankers are skilled at controlling the sale process and driving to the closing date.
Our Recent Experience With Negotiated M&A Transactions
PKF Investment Banking has a proven track record advising on negotiated sales. We help clients maximize value, strengthen commercial terms, ensure they pursue the right deal, increase closing certainty and run an efficient process. A few representative examples include.
- Client A – Engaged after receiving multiple strong offers, we quickly assessed the business, refined financial metrics and guided negotiations. The transaction closed within 100 days at a purchase price 11% above the best initial offer, with improved terms.
- Client B – After initial discussions with a promising acquirer, we validated strategic and cultural fit, recalculated key financial metrics and positioned the company’s value drivers. The deal closed in 135 days with a price above the target range and favorable terms for sellers and employees.
- Client C – Initially tied to an expired Letter of Intent, we repositioned the business, resolved structural issues and engaged a targeted group of buyers. Within four months, the client closed with a previously unknown acquirer at a valuation over 50% higher than the lapsed LOI, on highly attractive terms.
Contact Us
The PKF Investment Banking team is available to discuss current M&A dynamics and determine which opportunities may exist for your business. For more information, please contact:
- Robert Murphy
Senior Managing Director
PKF Investment Banking
rmurphy@pkfib.com | 561.337.5324 - Alberto Sinesi
Director
PKF Investment Banking
asinesi@pkfib.com | 203.273.5024
About PKF Investment Banking
PKF O’Connor Davies Capital LLC (DBA PKF Investment Banking) is a subsidiary and investment banking affiliate of PKF O’Connor Davies Advisory LLC. Securities-related transactions are processed through an unaffiliated broker-dealer, Burch & Company, Inc.
For more information, visit pkfib.com.
PKF Investment Banking provides this report for informational purposes only and it does not constitute the provision of financial, legal or tax advice or accounting or professional consulting services of any kind.