Getting the Best Deal as a Seller
Last week, I had a chance to sit down with Brendon Cussio, Morrissey Goodale’s head of sell-side M&A, to talk about what it takes for sellers to get the best all-around deals for their firms. Believe me, finding the time to talk was no mean feat given how busy Brendon is getting deals done for our clients—in fact, he was in the process of closing two deals during our discussion. Anyway, here’s how it went:
MG: Aside from “price,” what separates great deals from the not so great?
BC: Tax and legal structures are important considerations, but they are secondary to how the deal itself is structured. The headline purchase price is one thing, but what’s guaranteed? In a vacuum, a $175 million all-cash deal is actually better than a $200 million deal that is $150 million in cash and $50 million in, say, a three-year earnout. In addition to the present value of cash, a deal that features that kind of an earnout introduces a lot of uncertainty.
MG: What kind of uncertainty?
BC: What if integration takes six months longer than was initially discussed? That kind of delay could have a serious impact on revenue and profitability. Or what if a corporate overhead allocation is placed on your business? If you have an earnout based on EBITDA performance, this corporate allocation could significantly reduce your ability to hit your earnout target. Are you able to realize revenue synergies and cross-pollinate as well as originally advertised? Will you be able to get that work from the buyers’ clients that they sub out? It sounded good in theory before the deal happened, but so do a lot of things. Plus, there are macro factors in play. Will there be another debt-ceiling issue? Are interest rates that are at a two-decade high going to cause key clients to put projects on hold? Is another major financial crisis going to blindside us? Anything can and does happen.
MG: So, the further you extend the payments, the less certain things get, right?
BC: Absolutely. You hope things will materialize the way they were discussed during the courtship, but who really knows? The future is famously hard to predict, and you might talk yourself into how easy it will be because you want to get the deal done. For example, you might anticipate very few, if any, defections after the deal, but if a few key managers get spooked for reasons real or imagined and decide to jump ship (which can and does happen to even the best of firms), your ability to attract new people, keep key clients, and ultimately reach those earnouts is going to be impacted. Or maybe that promise of the bolt-on acquisition that was going to help you double your revenue turned out to be vapor, and you find yourself scrambling to fill the gap. In any case, time has a way of turning a walk-in-the-park earnout into an uphill battle.
MG: What else separates the good, the bad, and the ugly?
BC: The amount of gravy. You might not like gravy poured over your meal, but you want as much as you can get on your deal. Gravy is the consideration beyond the purchase price, like profits interest units (PIUs) or Class B units, transaction costs that are picked up by the buyer (such as prior acts coverage or rep and warranty insurance), cash to accrual conversion costs, or deferred tax liability (all of which could easily represent value in the seven-figure range). The longer the list, the better.
MG: What about balance sheet items?
BC: Those are very important. Who takes what on the balance sheet? If it’s a cash-free, debt-free deal, what is considered working capital as opposed to an indebtedness item? If it is a debt-free deal, how much cash will you need to leave on the balance sheet (which is essentially providing an interest-free loan to the buyer)? If you recently purchased new equipment and took advantage of the accelerated depreciation but still have a loan outstanding, who pays off the remaining balance knowing the asset will continue to generate additional revenue in the future? How is accrued PTO handled?
MG: OK, now let’s get down to it. How do you get those big multiples as a seller?
BC: First, understand your strongest selling points and continually redirect negotiations back to them. If the business is enormously profitable but the backlog isn’t busting at the seams and the multiples on revenue aren’t exactly through the roof, we carry the profitability flag because we know the buyer has an accretive rollup strategy, so the profitability is what they are buying. Sure, they get the revenue, too, but that’s not the headline. Second, don’t exaggerate your strength. When you do, the price has only one way to go when the truth eventually comes out—and it will come out.
MG: What else is important?
BC: The goose has to continue to lay the golden eggs throughout the process. The firm has to hold serve or better during due diligence and negotiation. This is why you don’t want to exaggerate. You lose leverage, and leverage is what wins the things you want, not just the things that the buyer lets you win.
MG: How do you prevent getting pushed around at the bargaining table when it comes to price?
BC: Have more than one option. If you are only negotiating with one buyer, you can’t be sure you’re getting the best deal possible, and the buyer might very well know you have no other alternatives. It’s a bad recipe for a good deal and even worse if you have to sell. But if you do find yourself in that situation and you can’t move the purchase price up, close the gap by finding other ways to win, like getting value for your key folks. The buyer will want to limit defections, so find opportunities to incentivize people to stay on board. The more you bring the focus to others, the more confidence the buyer will have and the less likely you’ll be arm wrestling over a price reduction or contingent money.
MG: What mistakes do sellers make that cost them real dollars in terms of price?
BC: They fall in love too quickly. They think their new prospective partner is the best thing since sliced bread, and they have not and will not consider other opportunities. You are naïve if you’re not entertaining other overtures or seeking them out. When you are only interested in one partner or one type of partner, it’s more likely than not that you’ll give ground on price and probably a lot of other things, too.
MG: What about who’s got your ear—and if they’re whispering the wrong things to you?
BC: Oh, yes. Taking bad advice is another misstep that will cost you big at the bargaining table. You may have a great corporate attorney, but if they’re not deal makers, they can really mess up the process, and that can definitely impact the valuation. We’ve seen attorneys come to the table with little to no understanding of the AE industry and the market, and advocate for a higher price or off-market terms with literally no basis for their requests. They harm the process to such a degree that the buyer, who could have been a great partner, becomes disinterested and chooses to go in a different direction. And if your tax advisor does your taxes but isn’t terribly savvy in the world of dealmaking—like not knowing about F-reorgs and how to leverage them—you’re apt to lose a lot of ground there, too. Building a knowledgeable, skilled, and reliable M&A team is the best way to get the best deal.
If you’re thinking about selling your AE or environmental consulting firm, send an email to [email protected] or call 720.309.0704.