By Abby Roberts, Sr. Director, Product Marketing, Corporate Development
As the post-COVID recovery continues to pick up momentum, it has become clear that we’re well into a seller’s market for M&As. Valuations are soaring, and sellers have the luxury of picking and choosing their buyers or exploring other liquidity options like SPACs. Deal conversations are coming down to issues like cultural fit, synergies, employee retention, and future growth.
It takes two to engage in an M&A deal, so it’s sometimes surprising that most of the focus has centered on buyer diligence. Now, with sellers very much in the driver’s seat, let’s take a look at four considerations that should be top of mind when selecting a buyer.
When it comes to the offer and the offer process, examine the relative track record of the buyer in terms of how many term sheets they issue, and their success rate in getting deals done. You will also want to look at changes in terms. Private equity buyers, for instance, are known for putting in one price and changing it at the end. So be sure to ask a lot of questions to determine whether the price is going to stick, and whether terms will change as you get through the diligence process.
As you work through the transaction, pay attention to what the deal will look like on the other side. Ask to see the buyer’s integration playbook and plan. Speak with the buyer about how well integrations have happened, and understand which ones have been successful, and which ones have been poor. For example, what's the track record of the buyer drawing down on escrow?
Financial considerations are a big part of buyer selection, but sellers should also consider what future career tracks will look like for their employees. For instance, what's the retention rate of acquired employees versus regularly hired employees, and what is the job progression picture? How many of the people that have been acquired end up in leadership roles at the company later on? How does the buyer measure and incentivize success?
Often times, sellers think only about the process of closing the deal. They may not consider the long road ahead, and what the next five to ten years may hold in store for them and their employees.
It’s important not to lose perspective on the outcome of an M&A deal. Consider whether the buyer is truly essential, asking yourself simply, “will I be more successful with this buyer than going it alone—or, for that matter, going with someone else?” The diligence questions you’ve asked about the buyer’s track record and deal terms can help you define success.
You’ll also want to consider how your organization will progress after the deal. Many sellers’ questions will tie back to their own unique history as leaders of their organization. Consider what you have been successful doing in terms of the makeup of your team, your mission, the vision of your products and technologies, and how well they align with the buyer.
It’s also important not to overlook cultural alignment of the companies. At a recent Datasite webinar, “Corporate Development Outlook: Buyer’s Circle,” 54 percent of participants in a live online poll cited cultural assessment and fit as the most common mistake buyers make. Take a close look at the potential buyer’s culture to be sure that both organizations are a fit. If you are not well-matched philosophically, you're not going to have success.
As a seller, take steps to understand the buyer’s objectives for the purchase. How much overlap does your business have with the organization that you might be joining? Is this a consolidation opportunity for the buyer, or is this an opportunity to really launch into a new product line or new market?
If it’s the latter, it’s likely that many career development opportunities will open up for the employees, because you'll have the opportunity to really stand on your own as a business within the buyer. Consolidation opportunities are obviously a lot more difficult, and introduce risk of redundancy.
It’s clear that the M&A arena is hotter than ever, and opportunities are ripe for sellers. If you’d like to take a closer look at how today’s dealmakers are navigating today’s landscape, register to access the on-demand replay of our recent corporate development roundtable. The first in a quarterly series, “Corporate Development Outlook: Buyer’s Circle” provides perspectives from top executives, plus the latest Datasite Insights Q1 data on deal volumes.