Posts made in December 2017

Let’s make a deal. M&A outlook bright for 2018, but don’t wait too long

A near record year for M&A transactions could occur

The Denver Post |  BUSINESS

Gary Miller,SDR Ventures. He writes a monthly column for The Denver Post.

By GARY MILLER | GEM Strategy Management. He writes a monthly column for The Denver Post

December 17, 2017, at 12:01 am

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As the year draws to a close, I can’t help but think about the economic outlook for mergers and acquisitions deal making in 2018. Before we discuss 2018’s economic outlook, let’s summarize 2017.  Following the election of President Donald Trump and the UK’s decision to leave the European Union, 2017 has been a period of apprehension for dealmakers.

These two events caused great uncertainty about the global economic outlook and left businesses worried about the implication of other key elections in 2017, particularly those in France and Germany. However, with repeated defeats for populist politicians in Europe, business and investor confidence has increased significantly coupled with the Eurozone’s rapid recovery. Since the worlds’ economies are interdependent, the global stage is set for solid economic performance in 2018.  A near record year for M&A transactions could occur.

This is a positive sign for the U.S. as the U.S. economy has its own numbers to brag about. According to Market Watch, on the one-year anniversary of Trump’s election win, the Dow Jones Industrial Average is showing its biggest post-election day gain in more than 70 years. The S&P 500 as added $2 trillion in value, up 16.3 percent since the election. The unemployment rate stands at 4.1 percent – a 17-year low. With less regulation, expanding trade deals, low-interest rates, low inflation, consistent corporate earnings increases, a rising GDP and now tax reform becoming a reality, deal making in the U.S. is set to rebound very strongly in 2018 over 2017. Deal-making could reach over $1.6 trillion in 2018 – up to $200 billion higher than in 2017 — according to multiple sources.

According to Deloitte’s fifth M&A Trends Report, about 68 percent of executives at US-headquartered corporations and 76 percent of leaders at domestic-based private equity firms say deal flow will increase in the next 12 months. Further, Deloitte reports that leaders see both the number of deals and the size of those transactions increasing significantly.

However, it is important to realize that the significant growth that we have seen in the markets to date is concentrated in two major sectors: technology and financial services. While other sectors such as healthcare, telecommunication, consumer and business services, and manufacturing are all expected to increase next year, there are wider differences among expert’s predictions.

So what does this mean for lower middle market and small-business owners? According to the 13 Annual, M&A Outlook Survey released by the law firm Dykema, respondents were bullish on the prospects of a strong M&A market. For example, over 70 percent of the respondents predict that the volume of small deals (under $50 million) will increase over the next 12 months. Sixty-eight percent of respondents said they would be involved in an acquisition in the next 12 months. An astonishing 80 percent of respondents expect an increase in M&A activity involving privately owned business in the next 12 months – increasing by 10 percent from last year’s results. According to Jeff Gifford, co-leader of Dykema’ s M&A practice, more companies are pursuing small to middle market strategic transactions.

According to some economists and financial research firms, 2019 and 2020 will reveal a decline in M&A activity in both the number of transactions and the value of the transactions. Some economists are predicting a downturn or a mild recession as early as 2019 – more likely in 2020–2021. Therefore, 2018 through 2019 are the year’s businesses will be looking to maximize their deal structures and values in their exit strategies.

I am recommending to clients who are thinking about selling their businesses to start immediately preparing their exit strategies in this uncertain business cycle. Even though it is impossible to forecast the ups and downs of the business cycles several years ahead, even six to 12 months ahead, preparing now for a sale in 2018, 2019 or 2020 is your best strategy to maximize the value of your company.

At a minimum, clean up your books and records; secure a valuation of your company from an outside professional valuation firm; update your governance and legal documents; secure a quality of earnings report; have your last three years of financials reviewed or audited by an outside independent accounting firm; develop strategies to secure your major customers for long-term sales; develop long-term employee agreements for your most valuable personnel; and develop a three-year strategic business plan for 2018 through 2021. Taking these steps could increase the value of your company to potential buyers as much as 30 percent. Next year could be the best of your life when it comes to cashing out. Based on what we know now, you have only a two-year window to sell your company.

 

The most important document you need when selling your business

Avoid overly optimistic projections and unclear company storyline

The Denver Post |  BUSINESS

Gary Miller, staff photo

By GARY MILLER | GEM Strategy Management

POSTED November 19, 2017, at 12:01 am

It was late on a Saturday afternoon when Don and his management team were finishing up an internal review of their company operations. The company had been on the market for 18 months without much interest from potential buyers. Don wanted to know why. At the end of the day, Don, the founder,  and majority shareholder,  gave up as he and the management team could not reach consensus on the reasons there was such little buyer interest. Don was beside himself since revenues were strong and earnings had continued to improve over the past five years.

The following week Don asked our firm for help. We agreed to conduct a business review and analysis of his company to determine what the company needed to do to attract potential buyers. After an exhaustive review, we found a glaring void in his management systems. There was no strategic business plan — only a hodge-podge of numbers, schedules, and projections that made little sense.

We met with Don and his team (all shareholders) and explained that without a solid business plan, no potential buyer would seriously entertain purchasing their company. We advised that a formal business plan was critical to the process of selling Don’s company.

Writing a strategic business plan can take weeks, even months of intense research, writing and rewriting – particularly if you have never gone through the process before. So you might ask, is it worth it? Absolutely. First, you’ll have a better understanding of your own business as well as your industry. More important, you’ll have a set of clearly articulated goals. This will help you organize and manage your business and give you a benchmark against which you can measure future performance.

Before you can begin to put the plan together, you will need to gather solid information about your industry. Every claim your plan makes will have to be supported by authentic sources and accurate information. Information sources include trade associations, magazines, newsletters, industry research reports and annual reports from publicly traded competitors.

Your plan will include your company’s past financial records, including a quality of earnings report from an outside accounting firm. Your financials should be audited or at the very least, reviewed by an independent accounting firm. Also, your business plan should include marketing plans and statistics from competitors so you can compare your numbers to firms of similar size in your industry. You will need research to identify who is buying products or services like yours and what current trends might be changing buying patterns and behavior. Compare this information to who is buying your own products and services.

In addition, find out who finances companies like yours and the details of the loan structure. Also, identify the kinds of companies buying businesses like yours.

Passion and enthusiasm for your company’s storyline is important for the sale of your company, but your target audience will see through hype and sales speak. Instead, strive for clarity, simplicity,  and thoroughness. Here are guidelines you should follow:

  • Don’t exaggerate
  • Make your sentences short and factual
  • Guide the reader with bulleted lists, numbered sections and clearly named subject headings and subheadings
  • Do not clutter the text with small details that will slow the reading process. Refer the reader to the appendix for more detail
  • Provide a table of contents so readers can skip to relevant sections they are interested in
  • Keep the plan to about 20 to 40 single-spaced pages, plus the appendices. The appendices can be as long as necessary to include significant detail

After you’ve completed this work, you can begin filling in the various outlined sections of your plan. Regardless of your industry, at a bare minimum, your plan should include a table of contents, executive summary, company/product/services analysis, competitive analysis, investment/purchase opportunity, industry analysis, market analysis, marketing plan, operating plan, manufacturing plan, management team, human resource plan, integration plan guidelines, financial plan and projections, buyer’s exit plan and appendices. More may be required depending on your industry.

I have read scores of business plans of companies and I’ve found the same mistakes over and over again. Here are some mistakes to avoid:

  • Rose-colored glasses
  • Unsubstantiated claims
  • Overly optimistic projections
  • Unrealistic cash flow projections
  • Numbers that don’t add up
  • Not understanding the entirety of the plan
  • Not proofreading the plan
  • Unclear company storyline

After all the work you’ve invested, make sure you don’t shoot yourself in the foot with spelling errors or incorrect grammar. Double check the numbers again and again. Produce a professional-looking document.

Remember, you never get a second chance to make a good first impression.

Gary Miller is CEO of GEM Strategy Management Inc., which advises middle-market private business owners how to prepare to raise capital, sell their businesses or buy companies.  970.390.4441     gmiller@gemstrategymanagement.com