Mergers, Acquisitions, & Extracting Value

Business owners looking at succession, or are beginning to evaluate whether they should sell to the next generation, must focus on extracting the most value from their business. The same line of thought applies to anyone seeking to acquire an existing business. Buyers and sellers are primed to seek out maximum value from the sale. 

During this time, a seller will consider a myriad of options of who they should sell to. Should they commit to a private equity firm, and to what extent should they remain involved in the business? One of the most overlooked components of an M&A is what happens to the company when certain relationships are severed. A buyer may rely heavily on keeping or evolving these established relationships to obtain the most value. Due to the amount of shifting variables, approaching an M&A from the wrong angle—from the POV of the buyer or the seller—can result in a loss for either side. 

Those with experience with M&As will attest that most fail to deliver the value that the seller or buyer expected. Roger Martin published the following in the Harvard Business Review: “Typically, 70%-90% of acquisitions are abysmal failures.” Buyers, too, are faced with the troubling statistic that one out of every four of these transactions will lower a business’s value. These outcomes will likely occur when a company is eager to branch out into an already established, thriving market they are not currently a part of. The result could be a buyer who paid more than the company’s maximum value added to an underwhelming return. 

In the opening of this article, we stated that some business owners are concerned with whether they are going to exit the business entirely or they are going to stay involved for a specified period to ensure a better transition. Buyers will be looking for what they can inject into a company to increase their return. The purchase price will decrease when a buyer senses that the owner’s involvement is vital to success. It is beneficial to both the seller and the buyer when an established, in-house management structure can run successfully in the seller’s absence. Sellers benefit from not having to be an integral part of the company post-sale, whereas buyers may view the current managerial system as something they can improve upon to increase the business’s valuation after they acquire it.   

Though we could provide countless other examples of how buyers and sellers can capture value from the sale of an existing business, we will close out with the need for time-tested systems and procedures. Systems are scalable, and they create reliable products. This is one of the reasons why Subway franchisees know precisely how many pieces of roast beef to put on their sandwiches. Regardless of what you think of their food, they have over 37,000 locations and generate over $16 billion in revenue annually. When a buyer is confident in the product or service, a seller may recognize that they can bring the product to a broader market. 

When you are in a position to acquire another business, utilize the expansive skillsets of the attorneys at Beckemeier LeMoine. We would be proud to assist you with mergers and acquisitions. Contact our office to schedule a consultation with one of our established business law attorneys.

Call 314-965-2277 now or contact us online to schedule a consultation with one of our highly skilled attorneys today.