For buyers, there’s been a significant shift towards focusing on the operations of a business, says Nick Fedorchak, Director at Palm Tree LLC. For sellers, that’s meant a more rigorous diligence process as buyers attempt to ensure that their investments are sound given the challenges conducting M&A in this economic environment.
“Just a lot more focus on the operational side of the business and what that looks like long-term from an investment hold standpoint as the holding periods increase over time,” Fedorchak said at the Nashville Smart Business Dealmakers Conference.
Being on the advisory side, he says among the most challenging areas for seller deal prep is around data integrity. So, when he’s brought into a deal, their emphasis is on consistency of reporting, financials and the ability to reconcile between sell side and buy side quality of earnings is of the utmost importance.
“When I think about a business prepping for sale, I think about what is their ability to conduct a diligence process?” Fedorchak says. “What do their back-end office processes look like? Are they robust? Are they institutionalized? Is the data prepped in a way where it's easily digestible? Too many times have I seen a buyer come to the table and there's conflicts in the financial statements. Then either multiples start to get turned down, or there starts to be really tough conversations.”
His focus, then, as an adviser, is on prepping the accounting processes and teaching the sell-side team what a diligence process looks like and bringing on additional capacity to help juggle it all. That’s because the process can put a lot of strain on a management team and ultimately drive lower performance in the business in the short term.
“And that is the last thing anyone wants to do is to suffer in the short term financially because they're distracted with fulfilling buy-side quality of earnings requests or other analytical diligence areas,” he says.
Time kills deals, he says. So, if a seller takes three months to answer a diligence request, it can give the buy side three months to think about areas where there could be problems. That could cause the seller to lose the buyer. Speed is of the essence, he says.
There also are incremental areas such as having one clean data set, getting help to deal with the excess capacity, setting clear expectations, professionalizing the management team by walking them through what buyer discussions look like, and establishing the industry KPIs that should be focused on and how they should be talked about. A team that's been coached and professionalized, he says, shows better in the market.
Focusing on operational improvements in the long term really is the best sell-side readiness in the short term, he says. And ultimately, having the business run smoothly, clean and being ready for the sell side is key to a successful transaction.
“On the sell side, I would suggest that sellers surround themselves with industry experts as diligence becomes more rigorous, transactions become more complex,” Fedorchak says. “And keep the goal in mind that it's about communicating future growth and profitability. The best way to do that is a small investment upfront with the right advisers around you.”
