For many mergers and acquisitions teams in the Mid-Atlantic, 2018 was a meteoric year. From consultancies to investment banks to law firms, numerous organizations active in the region set new records in terms of transactions closed and successful representation of buyers and sellers.
After all that, however, the market appears to be slowing down. Transactional opportunities still abound, but fewer are coming to fruition. Deals are taking longer to consummate and parties seem increasingly hesitant to commit.
This is hardly a surprising turn of events. The M&A market, like the larger U.S. and world economies, is cyclical by nature—and the two cycles are connected. M&A frequently reflects (and sometimes predicts) global economic upswings and downturns. A rapid rise and fall in M&A could foreshadow the potential recession many financial analysts are forecasting.
Changed Behavioral Patterns
What is driving the change in the market? The answer, as with all economic trends, is human behavior. Here are a few behavioral patterns I have witnessed among buyers and sellers lately.
- Heightened expectations among sellers. Nearly everyone involved in business transactions has been aiming for better-than-average results. This includes buyers and sellers, but I have seen it more frequently among the latter party. During one transaction in which my team was involved on the buy side, the seller had an unreasonable understanding of the value of his business and its associated risks. When he discovered that our client did not share his viewpoint, the deal fell through.
- General inflexibility. In more than a few recent transactions, negotiators on all sides of the table have been less than willing to reach a compromise. Again, inflated expectations are sometimes to blame, but other emotionally-charged factors—such as impatience and negligence—can aggravate the issue as well. In one would-be deal, our team found serious employment issues at the target company, but the seller would not agree to a change in terms based upon our team’s request for indemnification and hold back.
- An increased emphasis among buyers on quantifiable value. Buyers are considering their pricing more deliberately, and business owners haven’t caught up. Too many sellers believe they can set the terms of the deal and reach a clean, direct agreement without much effort. One of our sell-side clients learned that this isn’t the case when the buyer dinged them twice on the company’s less-than-stellar EBITDA number (which continued to drop).
- Burnout. M&A is a long and grueling process. Regardless of deal size, buyers and sellers need to steel themselves for a challenging, stressful, and exhausting road ahead. I suspect some people hoping to make a deal in the current environment haven’t considered how onerous it would be in any environment. It’s important to anticipate and prepare for hardships. Otherwise, expect breakdowns in communication and feelings of resentment. During a recent negotiation, for instance, the prospective buyer asked our client to reduce the purchase price—without providing a reason why. This sort of antagonism, which shouldn’t be present in any deal, underscores the difficulty of M&A—and the necessity of a good advisory team.
How to Take Advantage of the Slow-Down
Regardless of your strategy, the same best practices apply. Business owners looking to sell now or later should keep the following pieces of advice in mind:
- Prepare, prepare, prepare. Wherever you are in your business’s lifecycle, there is never a better time than the present to optimize your organization for sale. Eliminate any “skeletons,” such as operational inefficiencies and gaps in management, that could hurt your business’s value. Organize your finances, tax returns, contracts, and other critical documents. Build relationships with potential buyers. Assemble your M&A team by reaching out to your trusted advisors—your accountant, attorney, board members, long-term investors, friends, family, and so on.
- Lock down your greatest asset: your people. The value of an organization largely rests on its key employees. If you are ready to sell, communicate your intention and plan to the members of your organization. If you are unable to sell your business now, consider your risks of turnover in the next few years and make sure to secure your top talent.
- Don’t jump into an LOI. A letter of intent (LOI) is typically not a legally binding document, but it does set the general terms for a transaction—and once it’s been signed, a seller cannot go back. Work with a qualified M&A advisor to negotiate the best possible LOI with a prospective buyer.
- Remember—time is the enemy of opportunity. In The M&A industry it is said that “the passage of time is not a strategy.” Unlike a fine wine, your business doesn’t get better with age. By delaying the sale of your business, you are not necessarily increasing its value. On the contrary, organizations whose owners wait too long frequently lose value. Moreover, owners should consider if they can adequately continue running their businesses during an economic downturn.
You Can Retire Wealthy in 2019—or in 2026
Although the M&A market may be entering its down phase, buyers and sellers still have plenty of opportunities now and in the near future. If you’ve been considering selling or buying a business, the time to act is now. Otherwise, be ready to continue along your current path until the next M&A window opens (likely in five to seven years).
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael N. Mercurio is a principal with Offit Kurman, Baltimore, where he is a leading attorney in the field of mergers and acquisitions. He serves as outside general counsel in buy-side and sell-side M&A, as well as in all corporate law and financing matters and regularly counsels entrepreneurial individuals and assorted entities on the many challenges, issues, and opportunities companies face throughout the business lifecycle—from start-up to eventual exit.