The Most Notable Misconceptions in an M&A Transaction

Acquisition of your company doesn't always mean an exit. Take your partnership to the next level.

Englewood, United States - September 26, 2023 / ASA Ventures Group /

Overview: An acquisition of your company doesn't always mean an exit, it could mean a partnership to take you to the next level.

If you are a business owner or you know a business owner, you are the right person to read this piece. As business owners ourselves, we know you have limited time and attention and you are being pulled in many different directions. Managing your time to focus on the tasks that will drive the business forward can be a difficult issue. Every business owner has thought about a succession plan. If you have thought about one but pause because you are so busy, this content is for you. Why? Just like planning for retirement, succession planning is something everyone knows will come one day, something that takes a long time to prepare for and only those that do the necessary preparations will have success. There are many options to get out of your business: sell the assets, give it to family, give it to the employees, or sell to a strategy that approached you. However, none of those will have all the components of working with an M&A Advisor: fast, limited time on your part, makes you more cash than any of the others, and leads to a potential partnership with sophisticated business people.

Misconception 1: You need to devote a lot of time upfront if you are going to sell your business with an M&A advisor!

At ASA Ventures Group, our M&A process is designed to put all the upfront work on our shoulders so you can focus on your business throughout the M&A process. In order to get to the point of having offers from viable buyers, it will require 2 one one-hour calls with you and your financial person and a download of our diligence items request list. You then won't hear from us until we present you with offers. After the offers are in, you decide whether you like the acquirers/valuations. If you do not, we pause the process as long as you want and run it again, all on our dime. If you like the offers, you will get more involved, but you will WANT to because of the opportunity you see with the acquirers. If you are thinking about succession, do not miss out on the potential to make generational wealth, partner with a great team, and have it your way after the transaction.

Misconception 2: In order to be the right candidate for an M&A transaction, you need to want to walk away.

While a succession plan is part of what we do, the majority of the transactions we completed over the last three years had the original owner of the company staying on for the next 2-5 years after closing the transaction. Most business owners think preparing for an exit is one thing when it can actually be something completely different. If you want to exit in the next 3-5 years and you are growing, you do not necessarily need to wait and keep the equity risk over that period. You can either add a capital and strategic partner to help grow the equity you keep in the business or have market compensation until you fully remove yourself from the business. For instance, we had a client who wanted to stay on after the M&A transaction but did not want to work as much as he had been. We structured the transaction so he stayed on as a board member.

Misconception 3: It takes on average 9-12 months for an M&A transaction to be completed.

We like to say time is the killer of all deals. Why? Because the world changes quickly, pandemics happen, and recessions happen, so when you start an M&A process you are racing against the clock from the start. The other reason is acquirers will take their sweet time analyzing your company unless there is someone, the bad guy (that is us) to push them along and let them know there are 10 other buyers we can go to unless they MOVE QUICKLY. Most of our clients actually have a buyer or two looking at buying them when they sign up with us. They tell us this buyer is taking a long time or they make it to the Letter of Intent (LOI) stage only for the deal to fall apart. Why is that? COMPETITION. Buyers need to know they have competition to get to the close table quickly and under the terms that were agreed to.

If something does not go wrong in the transaction, it should be completed in 6 months or less. At ASA, we like to have 1-2 deals per managing director so you can call us at any time of the day and have a quick answer. This also means each transaction goes very fast. Again, time is the killer of all deals.

Misconception 4: Going through an M&A transaction and staying on with a capital and strategic partner always means lots of changes for your position/role.

The first question is why would you sell the majority of your company to a capital and strategic partner? If you answer "Yes" to any of the following questions, then this type of M&A transaction might be for you. You do not know what you would do upon exiting your company? Do you like working on parts of your business, but not others and would like to keep working but to a lesser extent? In other words, are you tired of the burden of ownership? Do you see a lot of growth opportunities/initiatives in your marketplace you want to take advantage of but don't have the time or money to do so?

What actually happens in this type of transaction? After the transaction, you own a minority equity stake in your company (10-40%) and the partner owns a majority equity stake. You will be compensated a market salary based on your position with a bonus structure in place. Your position/role in the company will not change much unless you want it to (we work through this prior to picking an acquirer). Your management will have the opportunity to earn equity in the company and have long-term incentive plans in place. You will explain to your team that you are staying and that this is a partner that is going to help grow the company.

What about losing control of your business? On paper, you lose control. In reality, the entire company is and has been loyal to you during their tenure. If you and the employees do not like what is occurring, you and they ARE the company. In short, the partner will not want to anger you in any way.

What is the upside? This partner and you grow the company via inorganic methods (acquisitions) as well as organic methods (sales and marketing, operational efficiencies, etc.). 3-5 years after the first transaction, that minority piece of equity you held onto could be worth much more than the majority you originally sold. The partner will want to pull you out of working IN the business to, instead, work ON the business. Capital for growth will no longer become an issue. All of those aspects of your business including developing new service lines or penetrating new markets will now be possible. We can even structure the transaction so you are fully pulled out of the business and you work much less as a board member. Therefore, you get more time with your family and other interests without fully exiting.

If you talk to any of our previous clients over the last three years, those who stayed on with the acquirer did not have material changes in their role/day-to-day. Some were busier because of the growth they were experiencing after the sale. Others stayed on as a board member so their day-to-day got less busy but they still enjoyed the parts of the business they always enjoyed working on.

Misconception 5: If you already have a buyer looking at your company, you should not engage an M&A advisor.

This may sound self-serving on our part but this is truly, truly a missed opportunity that we HATE watching occur. Unlike public companies, private companies do not have a market to sell their equity by virtue of being private. Our job as investment bankers is to CREATE a market for your company. Why do stocks like Tesla have an absurdly high valuation even when they are losing money? Because of competition in the public markets, in other words, there are MANY, MANY buyers. If you sell to the first or second strategic company that approaches you, it is like Elon Musk asking one buyer what the value of Telsa is and then selling the entire company at that valuation.

As investment bankers, we scour the market and leave no stone unturned to find everyone who would have an interest in acquiring your company. This generates competition with many buyers to find not only that high valuation but also the best partner/home for your company.

All of our previous clients had someone looking at their company to buy them prior to engaging us as their advisor. We included this party in our M&A process and once they caught wind of the fact that competition was being introduced. ALL of those initial buyers dropped out of the process. There are horror stories of companies looking at buying our previous clients and dragging their feet or going through diligence for 4-5 months and not consummating a transaction. To keep buyers honest and moving quickly, you need competition.

Misconception 6: Owners know enough people in their industry to likely know who ends up buying their company after working with an M&A Advisor.

When we sign on a typical client, one or a combination of the following scenarios makes up their knowledge of M&A. First, they have had, or currently have an acquirer looking at purchasing their company. This acquirer had approached them without solicitation. Second, they know someone who had their company acquired. Third, they have been through acquisitions before, maybe they have sold or bought companies in the past.

What is crazy? No matter what scenario our client falls under, 95% of them have never heard of the acquirers we bring to the table. A good analogy to what we do as M&A Advisors/Investment Bankers involves looking back in history before the electronic stock exchange. If a seller wanted to be connected with a buyer, they would contact a broker who would go out and find buyers. The seller was not aware of all the buyers in the market without the broker's help. In the same way, we are in contact with buyers every week. Receiving updates on their acquisition criteria, their funding commitments, their recent acquisitions, etc. We know the universe of acquirers that business owners do not have the time to research. We 'make a market' for private companies just as brokers did for public companies before electronic stock exchanges existed.

In 95% of the businesses we sold, the original owner did not know the buyer who ended up buying them

We will always include the input from our clients and their ideas around a strategic partner but we go out to the market and find it.

Contact Information:

ASA Ventures Group

3615 S Huron Street
Englewood, CO 80110
United States

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