M&A Roundtable Takeaways: Preparing for a Transaction

Roundtable Overview

During a recent virtual roundtable hosted by Axial, SDR’s Scott Mitchell joined fellow M&A professionals to discuss common questions and concerns of business owners looking to complete a transaction process.

The questions and discussion framework were provided by a curated group of business owners and operators participating in a variety of industries including Media, IT, Technology, Industrials, Biomedical and Events & Catering.

Advisory Panel Members:

- Scott Mitchell, Director of Investment Banking, SDR Ventures

- Spencer Clawson, Partner, Peterson Partners

- Thomas Courtney, President & CEO, The Courtney Group

- Doug Rodgers, Chairman, Focus Investment Banking

To read Axial’s coverage of the roundtable event, click here.


What Is Your Plan for the Next Chapter?

Have you been considering a sale, recapitalization, or financing to grow your business? If you are interested in exploring your options, our team of M&A professionals is here to help. Please contact Scott Mitchell at smitchell@sdrventures.com or call our offices at 720.221.9220.


Discussion Topics & Takeaways

Preparation & Timeline

Begin thinking about a transaction 3-5 years out to provide plenty of time for business owners to prepare the team. During this time, business owners should:

- Become familiar with different players in the space.

- Get to know a variety of buyers.

- Study up on all the necessary materials needed for a smooth transaction.

Once a business owner is about a year out, they should find a lawyer, investment banker (and anyone else they would like to add to their transaction team), and discuss what they will need to pull together the required materials.

Life comes at you fast, and the ideal scenario and picture-perfect timeline rarely presents itself. Because life comes at you fast, business owners should begin the M&A/capital raise education process as early as possible. An important characteristic of a successful business owner is having the awareness to surround yourself with people you can ask questions to. Talk to investment bankers. Get introduced to investors. Preparedness comes through consistently having discussions like this over time.

Understanding Your Financials

Investing in accounting — while not very exciting —is ultimately worthwhile, especially if/when you decide to transact. As a business grows, the operators should consider moving to GAAP, which is a standardized accounting system that makes it easy to compare financial statements.

Consider performing financial audits and quality of earnings studies before the transaction process. While it may not be standard practice for small businesses, clean financial statements can provide a level of credibility for businesses looking to transact.

To learn more about the benefits of conducting a quality of earnings study, click here.

Axial CEO Peter Lehrman sums up the topic, “If you’re massively underinvested in the financial hygiene of your business, you’re headed for really rough sledding in a capital raise of any significance, or certainly in an M&A transaction.”

Management Considerations

Many of the entrepreneurs were interested in hearing more about the pros and cons of professional management. Many small businesses don’t have the resources to bring in professional management teams, so how do investors and buyers think about the professionalization of management versus the development of the existing team?

No question having a built-out management team increases the attractiveness of your business to a wider range of investors.  There is no one right answer as far as developing talent in-house or bringing it in from the outside.  However, outside talent is a riskier proposition so, if possible, these hires should happen well in advance of a sales process to make sure they are the right fit for the organization.  Additionally, business owners should focus on talent that has the potential to impact revenue growth or margin improvement the most.  Finally, if a business owner is looking for a near-term exit post-transaction, his or her salary may be “added back” to profitability if a capable president or CEO is in the business.

Investment Banks: To Hire or Not to Hire?

One of the most common questions we received from business owners was around the use of an investment banker. Should I hire one? What are the pros and cons of working directly with an investor or a buyer? Can I get through a transaction by myself? If I do use one, how do I find the right M&A advisor?

While it is possible to do a deal directly with an investor and buyer without an intermediary, all of the deal professionals agreed that even if you don’t hire a banker, you’d be remiss to not at least talk to one before transacting. And generally, the less experienced you are, the more it makes sense to work with a professional to ensure you’re well prepared and ultimately getting the best valuation for your business. Scott Mitchell, Director of Investment Banking at SDR Ventures, notes he has seen entrepreneurs successfully “DIY” their way through a transaction but notes that a lot of those management teams had prior M&A experience, and still fact-checked with many different individuals throughout the process.

Investment Banks: Fee Considerations

One of the entrepreneurs on the call working on a $5M capital raise brought up the topic of banking fees. After one call with a prospective banker, the CEO received a letter of engagement. Receiving an engagement letter after one call was cause for concern for this CEO – is the banker looking to collect a retainer without actually knowing if the capital raise was a viable option?

It turns out that this business owner’s concern was very legitimate. “You’re right to have alarm bells going off there,” Scott commented. “Your Spidey senses are up for a reason.” Scott goes on to explain that SDR only engages with about 20% of the businesses they speak with, and that’s because they only want to work with businesses that they can successfully help transact.

While engagement fees may seem expensive, it doesn’t come close to covering the banker’s cost (if they’re doing a good job).

One panel participant advised, “The key thing in the relationship with an investment banker is that you have chemistry with them, you have trust in them, and want to hear what their advice is.”

Scott agrees with these sentiments and says that SDR focuses on being a client advocate rather than a deal advocate. “If you’re going to work with someone who is going to go with zero down or very little engagement fee, no matter what deal they put in front of you, they think it’s a good deal,” he says. “They want you to close that deal because that’s the only thing you’ve incentivized them to do.”

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