Navigating Mergers and Acquisitions

Transcript

Hi. I'm Rick Dennen, founder and CEO of Oak Street Funding. To some, mergers and acquisition can feel overwhelming, but they don't have to be. Today, I'll cover what to consider before pursuing an acquisition, maximizing value in a deal, common mistakes that I've seen, and more.

What’s the first thing business owners should consider before pursuing an acquisition or sale?

To me, when considering an acquisition or a sale, it's are you mentally prepared for this. Are you being honest with yourself? Are you all in on this deal or is this just part of a business consideration? There's going to be a lot that goes on in this and I'm going to tell you one of the only things that I can guarantee you isn't accurate are the projections that you have in your hand.

Those could be higher, they could be lower, but you know they're not going to be spot on. So, you've got to be able to react. You've got to be able to, you know, immerse yourself in the business. Make sure you understand it and that you're fully on board with the management team that's going to be running it. You're aligned with them. Their compensation is aligned, and you know what the end game is going to be.

How can owners position their business to get the best valuation in an M&A deal?

I would tell you that I think the most important thing that buyers are looking for is a consistent growth. You know, they're going to identify the business. They've evaluated the industry. All those types of things they would have checked coming in to those discussions. But if you have shown and exhibited consistent growth over a couple years, probably a minimum of three, that is a huge contributor to adding to your multiple.

A couple other things to consider is the management team. Is the management team staying with the deal? Are they aligned with the new business owners?

Also, I would consider, like, the market sizing, how the market has changed. You know, for example, how tariffs impact it. How are interest rates going to impact the business? Customer concentrations that may exist. The less concentration you have, the better. So each one of these things can impact the multiples. But when you stack those up between growth, a great management team, a good market sizing, you know, no concentrations, you know, you're going to get the best multiple for sure when you execute on your transaction. And also, you'll get the most bids and having competing bids will continue to drive up that valuation.

What are the most common mistakes you see sellers make during negotiations?

Probably the number one mistake I've seen is when a seller is trying to hurry the transaction.

I think that sends some really mixed signals to the buyers that there's something going on in the market. There's something going on inside the company. There's something going on with customers, there might be some bad debts coming. There might be a customer that's going to fire you soon.

We have certainly seen that as we've provided debt over the years and we've learned from it. If people are just pushing, pushing, pushing and there's not a real solid reason why they want to get this deal closed, then it's going to kind of raise those yellow flags and we'll start questioning it. And we've actually walked away from deals at that point in time when we haven't really got a good answer for why that's being rushed along.

What are the most common mistakes you see buyers make during negotiations?

To me, when a buyer is buying a business just to get a deal done. And I've said to sellers, and I've said to buyers or people taking on debt, you got to follow your gut. You got to know what's going on.

The worst deal you can do is just doing a deal to get it done. So, if a buyer is coming into a business and they don't have expertise, they don't understand the management team, they don't understand the business, but they need to deploy some capital. They need to show that they're being productive or they may be incented on doing deals. That's not always the best time for a buyer to jump into a to an acquisition.

How does market timing play into M&A success or failure?

I think this is a real good question because timing is really important. I think this is something that should be evaluated periodically.

There were two five-year periods that we had that were, we had private equity ownership. And I will tell you, we evaluated timing each and every year. Not that we were trying to sell after year one or year two, because we still had a lot of things we needed to accomplish, but it was a constant evaluation of that timing to determine, you know, and to be talking about when's the best time to go to back to market. When's the best time to maximize your sale price? So that timing does play into it. Now, probably more than ever, you've got the geopolitical risks that can play into timing, tariffs that just came out, the interest rate changes, especially the acceleration of those under the fastest, you know, five percent, five hundred basis point increase ever.

You know, those types of things have dramatic impacts on valuation. So sometimes they're tough to predict, very tough to predict, but to the extent you're talking about them with your board and trying to figure out that best time is really important.

If someone is nervous about the complexity of an M&A deal, what’s your biggest piece of reassurance?

My biggest piece of reassurance is don't do the deal. As I said previously, follow your gut. And the worst thing you can do is to get into a deal when your gut is telling you not to do it because you have something weighing you down, something that you don't believe in, something that's just, you can't get an answer to.

And that is not a good time to get into a deal. And I think you need to clear, you know, all of those types of hurdles before you're jumping into a transaction. That's on the sales side as well as on buy side. So, make sure you have the right partners in transactions and I think that a lot of those things will play out. Again, being private equity owned, I was very fortunate to have different options when we were looking at who was going to own us. And, you know, we chose tremendous private equity sponsors that had the same alignment as we did, understood the business very well, or willing to help if needed, and provided great counsel to us that resulted in, you know, a really nice success story for all.

Mergers and acquisitions can feel complicated. But with the right preparation, knowledge, and management team, they can create incredible opportunities. Thanks for joining me today. Thanks for joining me today and stay tuned for the third video in this three-part series when I will be covering the topic of succession. Take care.