Insights

Everyone’s Asking (Again): Are Private Company Sales Getting Done?

By Steven Keeler

The M&A Market is Still Open for Business

Business owners, investment bankers and private equity players are telling us they’re still busy pursuing deals and that they expect deals will continue to get done through 2022 and into 2023. We certainly have plenty in our work pipeline.

Everyone knows 2021 was a hot M&A market, and most know by now that economic and geopolitical uncertainty has slowed the pace of deals. But rather than worrying about this (perhaps healthy) cool-off, many business owners and deal makers still see the current market as good for sellers and buyers. Sorry we have to state the obvious again: every business and its owners, and their exit planning timing, is different and not all market-driven. So, for now, many private companies are moving forward with a sale in late 2022 or early 2023 rather than waiting for the M&A market tea leaves to become a crystal ball.

How is M&A Staying the Course?

Although corporate strategic buyers have around $3.7 trillion in their war chests (Source: S&P Capital IQ) compared to private equity buyers having around $948.9 billion (Source: Prequin) in “dry powder” for buying companies, PE-buyers continue to lead the market. They have to, because that’s their business. Corporate strategic buyers are pulling back a bit due to increased antitrust and other government regulation, lower stock valuations and higher debt financing costs.

But you ask: what about the business economy “clouds” (heard enough yet about supply chain, China, Russia and Europe’s struggles?), the pandemic “hangover” and its resulting “great resignation” and other difficulties in hiring talent? And inflation and interest rate increases? Of course, these may put pressure on businesses and PE buyers looking to do LBOs, as well as consumer wages and spending. But, particularly in the U.S., these clouds have not yet impacted deal flow.

Some of this bears repeating. Headlines are confusing in that some focus on these economic clouds while others report continued economic expansion and CEO confidence. But, as we have heard for the last decade, there is still substantial corporate and PE capital out there to do deals. Public market volatility definitely hurts IPOs and brings company valuations down, but the continued capital “overhang” is still driving an active M&A market.

It's Your Business, and You Have to Consider Its and Your Unique Goals and Timing

Economic and market factors should always be in the mix when deciding whether and when to exit. But company founders and CEOs need to focus on their business and their unique goals, opportunities and risks. Even (and especially) in an uncertain market, good companies and teams can differentiate themselves and pursue a fair deal by demonstrating how their company can meet and even capitalize on current business and market conditions. Buyers are looking for companies, so they will be all ears.

Staging Your Company: Developing Your Story and Cleaning Your House

Timing and Team

As much or more than ever, pre-deal company planning is critical. By pre-deal, we mean planning before you start a sale process or start sharing information with one preemptive buyer who may have called you. Assess your internal team and external advisers, and supplement them where needed, including having no-obligation discussions with investment bankers.

Ready Your Records for Buyer Due Diligence

Sorry to be a lawyer, but companies headed toward a year-end 2022 or 2023 exit need to get their “corporate” and legal house in order. Buyers get more conservative in uncertain markets, so successfully responding to buyer business, financial and legal due diligence will be more critical to getting and preserving a good sale price through transaction closing.

The Stuff That Matters to Buyers

Financial statements and revenue and EBITDA projections should be thoughtfully prepared. Employee agreements, restrictive covenants (confidentiality and IP assignment) and equity awards should be updated and organized. Company intellectual property, IT systems, data privacy and security protocols and all customer and other third-party contracts should be reviewed and updated. This work will add value to your deal, as buyers and their lawyers will get more comfortable that there are no lingering legal risks that should impact the company’s valuation. The same goes for tax, HR and import-export legal compliance headaches.

Honesty is the Most Profitable Policy

Our rule of thumb is to (after getting a good confidentiality agreement signed with a buyer) tell all and be as transparent as possible not only about your company’s strengths but its issues or challenges. Buyers love to hear about negatives and how you or the buyer can manage them going forward – this makes a buyer feel more comfortable that you're being open.

In valuing your company, offering a price and moving to closing a sale on good seller terms, buyers want to know that your financial projections can be supported by your customer and other third-party contracts and relationships and that your company does not have many risky legal “skeletons in the closet”. The buyer, and their financial advisers and lawyers, will dig deep to confirm that their price is supportable and that your company’s house is relatively clean.

Get Yourself and Your Team in a Can-Do Closing Mindset

Adopt a positive mind-set about the work that will need to be done to get a deal across the finish line. Don’t give into the frustration you’ll feel by hundreds of buyer questions, and many repeated questions. This goes with the territory. Getting your house in order, and the indulging the buyer from LOI to closing by responding to their questions and request for information, will be your best tools for preserving their offer price and minimizing closing price adjustments and post-closing legal obligations. We like to say that good company housekeeping and management of buyer of due diligence are as important as a good legal contract to avoiding an ambush at the finish line.