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The M&A Transaction Process: Key Points for Business Owners to Consider

The first time we meet with a business owner, our primary objective is to understand their goals and what they are trying to accomplish. It is surprisingly common for an owner to be unable to outline a three to five year plan or articulate an exit strategy. Often, owners have spent some time thinking about exiting their business, but very few have yet crafted or engineered a specific plan to achieve that mission.

Meeting with an experienced investment banker, such as Matrix, is critical to becoming educated on the various types of transactions available to ownership. Business owners are often surprised by how each transaction can be customized to suit their needs and/or the needs of the various shareholders or constituents within their organization. Transactions come in numerous shapes and sizes, and Matrix is experienced at providing advisory services across a wide spectrum of transaction structures. Whether considering a sale of the business in its entirety, a partial sale, looking to raise capital, or just still evaluating all the options, we can help.

Below, we’ve outlined a number of questions and considerations we believe business owners should evaluate ahead of a transaction.

Pre-process Questions

  • Do you use an outside accounting firm to prepare financial statements – are they compiled, reviewed, or audited?
    In any transaction, the validity and defensibility of the company’s financial performance is paramount to achieving a successful outcome. As a result, we encourage owners to understand how their numbers are being examined. Outside accountants offer a variety of services in evaluating a business’s financial performance, with escalating standards of scrutiny. Matrix encourages its clients to pursue “reviewed” or “audited” statements from a reputable local, regional or national accounting firm prior to pursuing a transaction. Most buyers today will perform some “quality of earnings” process (QofE) to determine or confirm the company’s real normalized cash flow generation. Since most businesses are valued based on a multiple of cash flow, determining what the real numbers are is critical. Having the confidence that the numbers are valid and will stand up to the scrutiny of another third party is an important first step to ensuring the success of whatever transaction is pursued so that, all parties can rely on accurate data. In addition, it is important to gather basic information in advance, and assemble a package of financial statements, relevant sales, customer, and product data, etc. so when interviewing potential advisors, there is sufficient information to convey the performance of the company. Also, what is the quality of your internal information and controls? The ability to generate data in a timely fashion, particularly data that highlights the merits of your business, is critical.
  • What sort of taxable entity is your business (S-Corporation, C-Corporation or Limited Liability Company)?
    Various legal structures have significant potential implications beyond the typical knowledge of your average business owner. Certain tax structures are more advantageous than others when engineering or negotiating a potential transaction. Matrix encourages owners to understand their tax classification and discuss with a tax accountant or tax attorney the implications on transaction proceeds before entering into a deal. The sale of stock versus the sale of assets can sometimes produce staggering differences in sale proceeds.
  • What is your outlook on the growth prospects for your company?
    Investors and buyers will be keenly focused on both the historical and projected growth of your business. It is important to consider the opportunities that exist for your business: both near-term and long-term. Being able to articulate what bridges the business today to the business of the future is imperative. Having a “story” to tell regarding the opportunities your business is poised to pursue is important to consider. Also, what is the probability of achieving the company’s projections or targets? What is the timeline for achieving them? Are there any costs (capital expenditures, for example) required to position the company for the new opportunity? Can the current management team deliver the growth or are additional team members required in order to achieve the growth? What is the spend, if any, and what is the payback?
  • What are the risk factors specific to your business or industry?
    As part of the preliminary evaluation process, potential buyers or investors will try to assess the risk surrounding the company and ultimately, their potential investment. Is there risk associated with your customer base (e.g. concentration with one large account; are there long-term contracts in place)? For manufacturers, is there an element of environmental liability or product warranty issues? How did the industry perform during the last downturn (cyclicality)? Are there a large number of competitors or new entrants to the market (risk of losing market share)? These and similar questions are part of standard diligence practices in every transaction. The goal of the acquirer is not to interrogate, but rather thoroughly analyze and evaluate their ability to insulate themselves from the inherent risks that face any business or industry.
  • Who in my own organization should I confide in about a potential investment banking transaction?
    Like so many things, the answer to this question depends on the business owner’s preferences. For preliminary discussions, it’s entirely possible to keep the “circle of knowledge” to the owners of the business and perhaps a key manager or finance person. As conversations develop, and buyers/investors begin to request additional information, the number of individuals in the organization needing to know will inevitably grow. If certain managers are critical to the business and will be a part of its future, it’s generally advisable to bring them into the loop sooner rather than later. Their early feedback on strategic planning, ongoing operations, and preferred investors or buyers may help steer you and your company toward an optimal transaction.

If you have any questions regarding the information provided above, please feel free to contact:

David W. Shoulders
Managing Director
Matrix Capital Markets Group, Inc.
(804) 591-2034

The contents of this publication are presented for informational purposes only. While Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”) believe the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non-infringement. Matrix assumes no responsibility for errors or omissions in this publication or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.

What our Clients Are saying

  • “We are confident that our dedicated employees and loyal customers will be well taken care of by Molo Petroleum, LLC and Andeavor. Matrix did a fantastic job for us and I am very thankful for their professionalism throughout the entire process. Their thoroughness and attention to detail was extremely impressive.”

    Mark Ogren, President
    Croix Oil Company
  • “Finding the right partner in whom to entrust our legacy, our employees and our customers was the highest priority. The Matrix team understood our concerns and guided the process. I strongly believe the Mirabito and Polsinello families are each made stronger by this transaction and we are excited by what the future holds for both of our growing organizations. It is our intention at Polsinello to immediately find new opportunities to grow, especially within our motor oils & lubricants business.”

    Louis Polsinello, Jr.
    Polsinello Fuels, Inc.
  • “I appreciate Matrix’s strategic review of our business and management of the sale process, which has helped us achieve greater enterprise value.”

    Joe Topper, CEO
    Lehigh Gas
  • “As a family operated company for over 28 years, it was a very difficult decision to sell our retail units. We are confident we selected the best help with Spencer Cavalier, Sean Dooley and the Matrix team. Their professionalism, industry knowledge and patience led to a smooth acquisition.”

    Melinda Lewis
    Hurst Harvey Oil, Inc.
  • “We are very pleased to have worked with Cedric, Tom, Vance and Stephen on this transaction. Having to sell our company was a difficult decision. Yet, Matrix’s advisory work from start to finish was outstanding. We are proud of all that has been accomplished with their support, and from our employees and our dealer partners. We also are pleased to have 7-Eleven and SEI Fuels assume ownership of our sites.”

    Arturo Zizold, Chief Executive Officer
    Biscayne Petroleum, LLC and Everglades Petroleum, LLC