As an M&A Advisor, I am most fulfilled when I help clients exit their businesses on their terms and seamlessly transition into the next phase of their lives. My colleagues and I felt a tremendous sense of satisfaction last month when we closed a significant transaction for our clients, owners of a global lifestyle brand.
While all M&A transactions present a unique set of obstacles, this deal was particularly challenging given the international aspects, combined with the myriad implications of COVID-19. As I reflect on this unique transaction, I’ve identified three keys to our collective success.
Cohesive and Prepared Deal Team
I was initially introduced by the company’s CPA to one of the owners in May 2017. In that initial meeting, the owner indicated that he and his partner had a three-year plan to expand the business and sell in Q1 2020 (what amazing timing, LOL!). In the interim, he was interested in assembling a team of advisors who would help maximize the selling price.
He had the self-awareness to admit that “he didn’t know what he didn’t know” and was willing to engage a team of experts to help. This is exceptionally rare, and from my experience, a very strong indicator of future success!
As the owner began to share financials so that we could assess the value of the business, it became clear that the finance and accounting functions were a significant gap, as it is for many businesses we work with. Not atypical, the company had spent minimally on part-time bookkeepers and the inconsistencies in the financials reflected this.
In order for any company to receive a premium valuation, it’s imperative that financials are well structured, be consistently prepared on a monthly basis, and follow Generally Accepting Accounting Principles (GAAP.) With this need in mind, we recommended the client engage a highly experienced Interim CFO that specializes in working with lifestyle/apparel brands. The client took our advice and we helped source the ideal candidate.
Over the next few months, the interim CFO converted the financials from cash basis to accrual basis, established global financial processes (where none had previously existed), and led the company through a global financial audit and a Sell-Side Quality of Earnings project.
While the financials were being prepared and audited, the team (myself and two colleagues) created the marketing materials, developed prospective buyer lists, and built a comprehensive virtual data room. Our marketing materials showcased the key selling points of the business (e.g. financials, brand, customer acquisition/retention), while acknowledging potential risks (supplier concentration and wholesale challenges due to ongoing COVID risk.)
The process of creating the marketing materials and data room early in the process gave us a chance to work closely with the client and their legal team to collect/catalog all agreements, leases, insurance policies, etc. as well as tie-up loose ends (e.g. ensure all contractors to execute updated NDAs).
Armed with accurate and audited financials, a comprehensive Quality of Earnings report, established global financial processes, vetted marketing materials, and a deal team working cohesively, we were ready to confidently approach potential buyers with a compelling and defensible package.
Trust and Commitment
From the minute we met the sellers, we knew that they were dedicated to continuing to grow the business and would provide their full support for the M&A process. With no guarantee of success, the client took our advice and invested in the services of a highly experienced CFO and a global accounting, tax, and consulting firm. The owners continued to strengthen the business while the deal was “on market,” launching new verticals (e.g. housewares,) adding new key team members, and investing in operational efficiencies.
When we were ready to go to market in April 2020, we had no way of assessing the impact of COVID on the business or our M&A process. It seemed probable at the time that the process might need to be shelved until 2021, as buyers would remain focused on current operations and be unwilling to engage. However, we made the decision to push forward and approached over 300+ Private Equity and strategic buyers with the belief that if the company performed well through COVID, we might find a set of highly motivated buyers. As a result, we executed over 50 NDAs and commenced advanced discussions with eight buyers.
Once we selected a buyer to enter exclusive negotiations with, the buyer never hesitated in its commitment to the process, dedicating time and resources to pursue this opportunity in light of the COVID-related uncertainty and a significantly challenged lending environment, which forced the buyer to reach out to a record-high 50+ lenders. The buyer’s persistence paid off as it ultimately secured debt capital from a Tier 1 global bank.
Establishing trust between Buyer and Seller is essential in getting any deal done, and trust is typically built through face-to-face meetings. As travel was an impossibility, these relationships would have to be fostered through Zoom. We therefore established a weekly meeting schedule with a set agenda that facilitated each side progressively sharing information with each other.
Over time, both sides became more transparent about their objectives and concerns, and we learned to resolve issues collaboratively. All M&A transactions require commitment from buyers, sellers, and their respective advisors, but this transaction was especially unique given the fact that 60+ professionals around the world collaborated exclusively online to complete the transaction.
Sure, all of the advisors worked hard and served our client well, but I’d be kidding myself if I didn’t acknowledge the role that luck played in our collective success. COVID could have significantly delayed the process, or worse, harmed employees or the business, as it has for millions of other individuals and companies around the globe. As luck would have it, COVID turned out to be a blessing as the client’s sales and profits accelerated significantly throughout COVID and we found the ideal buyer, willing to deeply engage in light of COVID.
There’s an old saying in the investment banking world that all deals have to fall apart three times before they can close, but in this case, our deal also had to survive a once-in-a century pandemic, the most divisive U.S. presidential election of our lifetimes, civil unrest, international quarantining requirements, not to mention the disaster that is my kids’ homeschooling!
This project was especially meaningful for me as I consider this successful transaction to be one of the top accomplishments of my 25-year career to date. I would have not had this success had it not been for the trust and support of this incredible client, my colleagues, collaborators at other professional services firms, the diligent and savvy buyer, and of course, lady luck.