What do you have to do if you want to quit your business and put it up for sale? And the other way around, looking for that perfect acquisition, how to prepare? Professor Ard-Pieter de Man explains.

The decision has been made, the company will be sold. But for it to be an attractive deal, it is vital to enter the M&A market well prepared. Professor at the Vrije Universiteit of Amsterdam, Ard-Pieter de Man – School of Business and Economics, Department of Management & Organization – lists four items that require attention: revenue, cost, risk, and scanning the potential buyer.

“The buyer buys to grow his business”, says Prof. De Man. “So make sure you have plenty of orders and contracts. As an entrepreneur you can’t always control that of course, but if you know that an important contract will be extended in a year, and you want to sell your business before that, negotiate an early contract renewal. That shows the potential buyer that, even in the long run, cash flow and revenue will be OK. The more loyal the customers, the more certain the revenue, the higher the price of your company can be.”

That same buyer will also look very closely at costs to decide whether to acquire the company or not. De Man: “Has the company already been re-organized? What about excessive staff, and can unused real estate be put up for sale right now? What a potential buyer absolutely doesn’t want, are complicated employee termination procedures, obsolete IT and machinery, or insufficient knowledge and training of employees. Be sure to avoid those! Furthermore, don’t ignore investments. Has the owner of the company let that slide because he’s getting out anyway? Not wise: potential buyers will walk away, or – in the best-case scenario – offer a much lower price.”

The nightmare of any merger or acquisition is of course a skeleton in the closet. “You can never be 100 percent sure, but do check ongoing legal proceedings. Perhaps you can finish those before you put your company up for sale. Also check labor contracts, the relationships between employer and employees, what’s going on in HR, et cetera.”

Prof. De Man points out another aspect, particularly important during the ongoing war for talent: how loyal are key staff members? “Will those important and difficult to replace employees keep working for the organization, or are they ready to leave at any given moment? Make sure they’re satisfied, let them look forward to some great education and a promising career.”

The final question is: who do you want the buyer to be? “A refrigerator manufacturer acquiring a competitor will look mainly at your revenue. Does that company already own state-of-the-art machinery? It doesn’t really matter. A buyer like that is perhaps more interested in merging the two factories into one. But if, for example, the prospective buyer is a manufacturer of vacuum cleaners, he’s probably looking to diversify. He prefers to acquire an existing company because it is a completely new activity for him. In other words, decide first what kind of a buyer you would like to sell to, and then act accordingly, for instance by first modernizing.

On the prowl yourself
The other way around, are you ready to strike quickly in the often merciless M&A war? Cash is king. Ard-Pieter de Man: “So how are your finances? Are you using your own capital, will you borrow? Make sure all of that is arranged. Also, consult your shareholders beforehand, so you know what they want. Be ready for the post-merger integration: when the deal is signed, then what? Different processes will appear, new people will arrive in your organization, the differences in culture must be bridged. Often employees only know about the deal after it has been closed, because negotiations are usually done behind closed doors. Make sure that sufficient knowledge is shared afterwards, that people know where and how to find each other.”

Employees are also highly sensitive to a sudden relocation of the acquired company. People then need to move as well, or endure long commutes. That may well result in the departure of talent. Perhaps an option is to keep using the office location of the acquired company. “In that case the prerequisite is that both companies will cooperate closely – a true merger. If not, in the end more harm than profit will remain from that expensive acquisition.

Interesting to you:
Get a full understanding all aspects of M&A. Create more value in your next deal. Join ambitious professionals for the 4.5 day ‘Mergers and Acquisitions‘ program taught by Professor Luisa Alemany (London Business School) at Amsterdam Institute of Finance.

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