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How is your firm going to use its cash? – Part 2

Feb 18Jeff Matthews

Last week we began a discussion on an article by Dan Skelly, an Equity Strategist at Morgan Stanley, addressing whether businesses plan to return excess cash to shareholders or to invest cash in the business.[1]

I raised two questions:  Do you have the access to capital to invest in growth?  And will your firm be a buyer or seller in an expanding M&A environment?  This week we will focus on the M&A environment.

If you see the logical growth path for your company as a strategic acquisition, you may need to address your ability to finance the transaction.  For smaller businesses, acquisitions often use excess cash and new borrowing rather than stock.

Beyond financing the transaction, you will need to integrate the acquisition into your operation, supporting it with your existing management talent, and blending the company cultures.

The first step in an acquisition path is to define your need and then identify potential targets.  B2B CFO® strongly urges both sides of the transaction to assemble a Success Team™.  The Success Team™ is comprised of professionals with experience in transactions and is built to meet the client’s specific needs.  The Success Team’s™ role is to execute the transaction on behalf of the buyer or seller, supplementing the company’s management team and allowing management to stay focused on the business.

As a seller it is important to understand the demands of a sale process.  Your firm will be put under a microscope during the buyer’s due diligence.  This process will require numerous documents to be assembled, management members to be interviewed, tours of facilities and a review of the financial records.  Again, a Success Team™ will allow management to stay focused on the business, preserving the value for the seller.  B2B CFO® also encourages sellers to start early, developing a succession strategy and preparing the company for the sale process.  Well before a sale, focus on what a buyer might view as a short-coming that would result in a reduction of the sale price.  Address these valuation adjustments to maximize the selling price.

Always remember that according to Larry Reinharz, Managing Director at Woodbridge International, “the number one reason our deals get delayed or don’t happen is declining financial performance.”[2]  If management is distracted, the business can decline during the sale process resulting in a reduction of the transaction price at multiples of the profit drop.

 

 


[1] “Will Capital Spent Outshine Capital Returned?” Dan Skelly, Morgan Stanley Wealth Management newsletter February 2014.

[2] Mills, Jerry L. (2013). The Exit Strategy Handbook. ISBN 978-0-09886932-1-0, Jerry L. Mills and B2B CFO, LLC., pp.61,

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