Gary Arakelian, M&A Advisor, Stevenson & Co., Kellogg Adjunct Professor
A CONVERSATION WITH GARY ARAKELIAN ABOUT THE REALITY OF DEAL FATIGUE, THE KEY TO OPTIMIZING VALUE, AND THE ONE TRUE GOAL EVERY BUSINESS OWNER SHOULD EMBRACE
At the end of the day, what is the importance of having prospective buyers connect with the target company’s management team?
Strategic and financial buyers will assess so many components of a business in determining which investments they’ll pursue. In the case of a financial buyer, i.e., private equity groups, the quality and capability of a company’s management team can be among the most appealing aspects of a business. The expertise and strength of the team are deciphered, in part, by the company’s performance, and yet most financial buyers have little to no interaction with team members during a project.
Most successful transaction processes involve only the company owners and the top-level executive for good reason – a sale project will bring considerable disruption to a company if not contained well by the deal team. Members of the executive team are generally NOT made aware of, or involved in, the process until it is further along. One exception to that is the CFO – they, and the financial team, will play a critical part early on in the success of the sale project and they’ll be the primary resource for the M&A lead and the deal team. There is a significant level of expertise and work required in gathering, defining and reporting on data, systems and processes. Isolating the rest of the management team from the project is a survival tool for owners – the team must remain focused on driving and building shareholder value and market appeal.
Given the requirements placed upon a CFO, the financial and management team during a sale project, I often ask owners to objectively assess if their team is ready for the challenge. To alleviate some of the impact, owners may be wise to consider the services of a part-time financial executive to serve as a subject matter expert in either an adjunct CFO role (externally), or in an interim CFO role if the top financial exec is a Controller. As it relates to the sale project, this role on the deal team is extremely helpful to assess and optimize financial management, IT systems infrastructure and administrative processes. It allows the company to perform at its best, and everyone involved to remain focused on their respective goals. Overall, the ultimate value derived by the business owners for leading a well-run sale project has very obvious rewards – decide your course wisely.
What role does emotion and intuition play in the process of selling a company?
Both are critical – emotion and intuition drive most owners in the day-to-day operation of their business. Most investment bankers and M&A Advisor will tell owners that selling their business is one of the most important transaction of their career, and the process takes a lot of discipline, engagement and objective reasoning. An owner’s emotional reactions during a sale process have the potential to make or break the sale – and, in turn, the company, its future and its operating culture. While I agree with that perspective, as a former CEO myself I believe that an owner’s emotion around their quality of life plays an even bigger role – it can impact the individual owners and their company in catastrophic ways. I highly encourage business owners to think through and understand their quality of life needs and what will change for them before going down the path of a sale project. Keeping themselves mentally and emotionally healthy, happy and focused is the key to enjoying a successful sale project, and their new life afterward – and without it, life during and after may be difficult in ways they might not otherwise consider, no matter how much they net from the sale.
How do you shorten the time it takes to sell a company and create a more efficient sale process?
Timely preparation is one of the keys to increasing an owner’s likelihood for driving an efficient sale process, and a successful one.
Most companies are optimized to aggressively pursue their marketplace and serve their customers and employees, and rightfully so. They’re generally NOT properly prepared to explore the marketplace for sale options. A sale process requires significant preparation and research internally, and externally choosing the most effective deal team that’ll serve the owner’s defined objectives and timing.
Once a company begins the process, a series of assessments must be done – assessing the management team, internal data reporting, quality of revenue and earnings, IT systems and processes, operating procedures, just to name a few. In addition, the deal team will need to define metrics around customers, vendors, revenue and profitability trends that will all be used to create a go-to-market strategy, and define the company’s appeal to the market. These efforts are above and beyond normal day-to-day operations, and most companies find it very challenging to address them while still maintaining their focus on their core business. When it comes to the sale process, delays and the passage of time are generally not your friend.
Timely preparation, choosing the best deal team and identifying the resources to do the work is critical to enjoying an efficient and successful sale process.
How does “deal fatigue” impact the sales process, and how can it be mitigated?
Deal fatigue is fairly common during a sale process. It occurs because the process is outside the norm of day-to-day operations and the added responsibility, focus, risk and exposure take a toll on those involved, particularly the owners. This is where the emotion plays a large role. The issues that arise are often times new and unknown, so emotions and reactions are more apt to be triggered. The disruptions of the sale process begin to be challenging and demanding. At some point, nearly all projects experience deal fatigue in one way or another. And this is where your choice of an M&A lead director and deal team become critical – for their leadership, pre-emptive efforts, guidance and resourcefulness to move the project along at the right pace.
To mitigate fatigue, owner’s and their deal teams should clearly define their project path, milestones and timelines, and establish a consistent communication process – because simply not knowing can create significant emotion, anxiety and fatigue for any owner.
What do you think every business owner should know before selling?
Owners must know that not all sale projects are successfully closed. There are a number of factors that can serve to derail a project – lack of funding, customer concentration, economic or market conditions, performance downgrade – and any one of them can. To mitigate the risk, I encourage owners to do the necessary planning and preparation, and to be prepared to change course if needed. Every owner should realize that at some point in time, one way or another, they will exit their business. I like to pose a question to them before they proceed: What will they do in the next phase of their life, and what does their world look like in the post-sale time frame? For an owner, this can be either challenging or exciting, and it will dictate and drive their behavior during the project. It’s important for an owner to be as resolute as possible once they decide to sell, but not knowing or having a strong sense of their quality of life afterward has sidelined and sabotaged more than a few projects. The toll it takes affects more than just the owner and their business, it affects their families and everyone in their wake. Again, I like to ask owners to think about their quality of life, and how they define it both during and post-sale and to hold onto that perspective throughout the process to keep them grounded.
In your experience, how much money is typically left on the table if strategic planning for the sale is not done in advance?
Any business owner is well served to engage in upfront strategic planning to determine how they go forward in a sale process. It’s the same for any initiative, whether it’s a product launch, new service offering, or an alliance.
Strategic planning is critical to optimizing valuation, market position and appeal to the marketplace. Most sale projects arrive at a targeted list of potential buyers who engage for a deeper dive into the company’s operations. Through upfront strategic planning a deal team is able to evaluate each potential buyer and the value they bring to the sellers and their operation. Buyers are not able to quantify all aspects of the added value an acquisition may bring, and through strategic planning the hidden or intrinsic value that a company may have to a particular buyer can be highlighted, which can and willdrive higher valuations and an increased likelihood of completing the sale.
Any experiences with Gabby as an Interim CFO/COO to drive a smoother sale process?
I had the pleasure of bringing Gabriela into the preparation phase of a sale project for a growing company with a number of ongoing initiatives in play. For one, the company was revamping their enterprise IT system to deploy onto a global platform, which involved the redesign of financial and reporting systems, processes and procedures. The company had multiple divisions and a global presence, and that added to the complexity, and the market appeal, of the project.
Her work also involved the assessment and honing of the financial management team and IT group that owned responsibility for the project. Such a project might be manageable by an existing team in a normal operating mode if they had an experienced CFO and financial team. However, the company ran very lean and the sale project required that the processes, checks and balances be methodically planned and executed – and Gabriela oversaw the entire ordeal on the company’s behalf. Her leadership in redesigning procedures and putting in place checks and balances resulted in an extremely smooth and methodical due diligence phase, one that shone a light on the sellers credibility and their company, and helped expedite an otherwise tedious and challenging process.
Did it have a happy ending?
The result was that the sellers had additional leverage in finalizing negotiations, and a higher likelihood to successfully completing the sale. Too often due diligence efforts uncover problems, oversights and inaccuracies in a company that has existed for some time, and the result is the buyer uses this to now question the validity of everything – i.e., the leverage shifts to the buyer. This is the more common scenario in lower-middle market deals (≤ $50M in transaction value) where companies generally do not have full financial teams, formally audited financials, records or tax filings and would be well served by a confidential internal audit and process make-over.
The most difficult phase of getting any sale project complete is the due diligence phase, and the financial and legal work required frequently goes above and beyond the financial executive team’s ability to deliver effectively. The outcome is usually unfavorable to the sellers in the form of valuation, and the structured terms and conditions of the sale.
The work Gabby provided on this project clearly made the difference in swinging the process in favor of the sellers.
Of equal importance is the fact that Gabriela’s engagement and deliverables have served to make it a better company – better in how it operates, tracks, measures, reports and plans. Achieving THAT provided the sellers with a confidence level and the luxury to decide whether or not they wanted to go forward with the deal or continue to operate a stronger, better managed operation. For the buyer, the work performed during the sale process to clean up the internal processes and operations allows them to have a singular focus post-sale on growth and expanding upon their culture. For any company, that IS strategic planning with a strong purpose, and that should be the goal of every owner.