The term “M&A” is commonly used in finance and legal circles and in boardrooms across Australia, but what does it really mean? Put simply, M&A is short for mergers and acquisitions – i.e., transactions that bring together two businesses.
Selling your business, regardless of its scale or maturity, demands meticulous planning and foresight, should you wish to maximise its value. For those not well versed in M&A deals, sale processes can be daunting and time consuming and can often be a distraction for management.
Putting together a deal team
Owners contemplating a sale transaction should consider enlisting a team of independent and experienced professional advisors to help them navigate a sale. It is important that your external advisors work closely with you and with each other to arrive at your desired outcome. The key responsibilities of advisors in a sale transaction are noted below:
| Corporate Advisors | Lawyers | Tax Advisors |
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• Develop a financial model to establish a valuation range for the business; • Assist with deal structuring; • Create a compelling sale narrative; • Establish a bidder universe and formulate a marketing strategy to attract bidder interest; • Shop the business to multiple bidders to maximise competitive tension; • Coordinate due diligence process with bidders and respond to bidder financial diligence requests; and • Assist with negotiating price and terms. |
• Undertake sale readiness analysis;
• Assist with deal structuring; • Help to populate data room materials and respond to bidder legal diligence requests; • Prepare and/or review definitive transaction documents; • Lead negotiation of transaction terms; • Coordinate with external stakeholders to obtain pre-completion approvals; and • Manage deal execution. |
• Assist with deal structuring to optimise tax outcomes; • Respond to bidder tax diligence requests; • Identify tax risks; and • Assist with negotiation of tax aspects of transaction terms. |
Business valuation
Established businesses are often valued on a multiple of their earnings. Metrics like EBITDA are typically adopted by bidders as a proxy for the business’ capacity to generate operating cashflow. However, multiples applied to exit transactions may vary depending on the prevailing economic environment, the nature and scale of your business and its competitive position.
Key factors that bidders may consider when evaluating your business include:
- Quality of Earnings: the stability and reliability of the business’ future earnings; its cost-structure and margin profile and if future revenue has been secured or is otherwise backstopped by a strong sale pipeline;
- Customers: whether the business’ revenue is subject to customer concentration risk or if customer retention is problematic;
- Competitive Position: whether the business benefits from a durable and sustainable competitive advantage or if it operates in an industry with low barriers to entry?
- Growth Potential: the business’ growth prospects, including the future scalability of its operating model, the growth potential of the broader market and the likelihood of the business capturing market share from its competitors.
Preparation is key
Planning is fundamental to unlocking value in M&A transactions. Whilst there are many variables that drive valuation and multiples, well prepared sellers are best placed to address issues raised by bidders during the sale process and therefore avoid adverse price adjustments.
Undertaking a voluntary sale readiness exercise with your advisors can help to improve the seller’s perceived credibility by identifying any gaps, uncertainties or risks early in the process and mitigating those concerns before they negatively impact on price or terms.
If you are considering selling your business, please contact us at Rankin Business Lawyers for practical, on-point commercial legal guidance.
Veroshan Sripragasan
Senior Lawyer
