Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Why does that happen? And what does it take to buck those odds?
A panel of experts, sponsored by Upsize and Rick Brimacomb’s Club Entrepreneur, convened at the Minneapolis Club in June to share their insights on what it takes to make a successful merger, what mistakes are made often and on what the local M&A market looks like now and might look like in the months ahead.
Many people still think of Deluxe Corp. as the company from which they buy checks. Deluxe does still sell them, but that accounts for only about 40 percent of revenues now. For the last two decades the company has been diversifying, adding different products and services in an effort to become more valuable to its customers.
“We needed to be doing more than that and have a much deeper relationship with our clients’ things that would be in more organically growing spaces – things that would stretch our capabilities and take us way beyond just printing,” says David Graff, the company’s executive director of corporate development.
The company has done more than 50 acquisitions in Graff’s 20 years with Deluxe. Among the keys to a successful deal is the homework that needs to be done up front. One important factor is knowing your goal.
“What is it you want to do, what is it you want to achieve,” he says, adding that knowing early on what the end might look like and having the team in place to bounce around ideas that will help you get there are important first steps. “Get clarity around those goals. It doesn’t have to be lofty. It can be simple.”
Whether it’s diversification, playing defense to ensure a competitor doesn’t acquire the same target, adding skilled employees fast or shifting to a new focus, there are many reasons companies consider acquisitions. Universally, Graff and the rest of the expert panelists say having the right advisers helping research and structure deals is key.
While that can include internal people, each speaker shared anecdotes detailing times when external oversight could have helped a deal go more smoothly. It’s vital, says Ryan Turbes, partner at Boulay Group, that those working on a potential acquisition have had experience with mergers and acquisitions. He’s seen deals nearly fall apart because a company’s own CPA was unfamiliar with how some financial details should be interpreted.
“That’s probably the biggest frustration point we typically see in some deals,” he says.
Melissa Johnston, senior vice president with Highland Bank, says lenders should be brought in on a deal before a letter of intent is signed. Without educated insights, details can be missed.
“You’d hate to issue an LOI you can’t stand behind or put in some terms that are not going to work,” she says. “For example, earnouts aren’t allowed with an SBA loan. So, you’d hate to work hard on this LOI, get the earnout all buttoned up and then find out ‘I’m going to need an SBA loan and we’re going to have to change this.’”
Experts on mergers can also help throw out different ideas that might help advance a stalled negotiation, says Dean Willer, chair of corporate practice group at Winthrop & Weinstine.
“It’s often worthwhile to have a couple other trusted voices in there earlier,” he says. “They often can add a little more value on the front end than they could later on after a lot of the decisions have been made.”
In addition to not having the right team in place, experts say there are countless reasons deals either fall through or fail to have the desired effect on a company after once completed.
On the company side, Johnston says, one of the reasons for failure is when the existing firm and the acquired business have mismatched “go-to-market” strategies. On the individual side, she says buyers often have a vague strategic rationale for buying a business and sellers are occasionally not entirely transparent.
“I had a client that bought a service business a couple years ago and had found out after the closing that the seller didn’t renew the international license, which was responsible for about 30 percent of the revenue,” she says. “So, a lawsuit ensued and the seller ended up forgiving the seller note.”
State and local taxes are starting to interfere with getting deals done, as well, says Turbes.
“Over the last five years, my goodness has that changed with states being more aggressive. That whole area of our diligence has increased significantly,” he says. “We have killed a lot of deals because of state and local tax issues where there is nexus in other states. That liability, when you add it up, … it’s a pretty material number.”
Another important factor in the success or failure of an acquisition is integration. While getting a deal done after months or even years of negotiations can be a relief, experts say that is just the beginning. Many problems arise when companies do a poor job of bringing the existing and new businesses together.
“You get the deal done, it’s a big event, but then you have to play the rest of the game,” Graff says. “That’s where you’re going to judge your success. You’re not going to look back and say ‘gosh, Dean, that purchase agreement you drafted was pure poetry, that was wonderful.’”
“The design and structure are very important, but when you’re going to look back and figure out whether a deal was successful for you or not, it’s going to depend on what it ended up doing for you,” he adds. “Did it meet your objectives that you had going into it, either financially or strategically?”
“Integration, that’s the kickoff,” Turbes says. “That’s where the real legwork begins. It’s funny when you talk with people who have closed a transaction. They’re like ‘that was fun.’ But you don’t know what you’re in for now for the next year.”
The integration side, Willer adds, is where the rubber meets the road. “I think really savvy acquirers, on the front end, spend a lot of time thinking in terms of what the integration looks like after they close, not so much ‘okay, this is attractive, this is a sexy target.”
Johnston urged business owners who are pondering some kind of transaction to preserve some personal or business liquidity.
“If you are looking to make an acquisition in the next 12 month, two years, three years, now as a business may not be the time to develop those cost centers that have been on your mind” she says. “Now would be the time to retain that cash so you can put it toward an acquisition along with keeping a backstop because there are always unforeseen expenses, bumps in the road.”
It’s also important to set expectations, both internally and externally, with team members, sellers and even yourself, Willer says.
“Understand what you are getting into,” he says. “It’s going to be a lot of work. It’s a lot of stress, a lot of everyone’s time. Internally and then externally, make sure that they understand what you are expecting to see, what your timeline is so everyone goes into it with the most amount of clarity. … If you are good about setting expectations internally you won’t get personally frustrated as easily, you won’t get the seller frustrated as easily or your team frustrated as easily.”
While acquisitions are challenging, the experts say after several strong economic years they’re still doing a lot of deals. Johnston described the market in recent years as “frothy” and Turbes says Boulay is as busy as it’s ever been.
That said, Johnston informally surveyed some of her broker and investment banker contacts and she senses the market may be slowing, if only just a tad. Interest rates remain low, credit is available and it remains a seller’s market, she says. But they are starting to have to give just a bit more.
“I wouldn’t say it’s a slowdown by the nature of that word, but I’m just seeing things starting to turn a little bit,” she says.
Willer recalls folks during high times a decade ago saying they were waiting for just a bit more, only to get stuck in the business when the market tanked. He’s been telling clients for four years that if they want to sell the time is now. Sooner or later he’s going to be right, but for now he remains as busy as ever.
“Between the low interest rates and the enormous amount of kinetic activity on the deal side,” he says, “it’s been a fantastic and fun M&A market the last few years.”
DAVID GRAFF, executive director of corporate development at Deluxe Corp.: 651.787.1405;
da*********@****xe.com; www.deluxe.com.
MELISSA JOHNSTON, senior vice president at Highland Bank: 952.858.4798; me**************@***********ks.com; www.highlandbanks.com.
RYAN TURBES, partner at Boulay Group: 952.841.3104; rt*****@*********up.com; www.boulaygroup.com.
DEAN WILLER, chair of corporate practice group at Winthrop & Weinstine: 612.604.6633;
dw*****@******op.com; www.winthrop.com.
