Macroeconomic factors are driving due diligence that is much deeper, taking longer and is more important to deal making, says Mark Kessler, a partner at Palmares Capital Partners.
Looking across the market, he says there is increased activity in the private equity side of deals, especially in the noncontrol world.
"I think that there could be a Psychology Today study with a lot of owners that were thinking about selling in 2021 and 2022, they didn't get there, and then, at the end of the day, looking themselves in the mirror and saying, ‘I really just didn't want to sell,’" Kessler said during the Atlanta Smart Business Dealmakers Conference. "I was kind of kidding myself. I heard my guys at the country club saying how much money they were making. And I want to do it, but I love my company. My company is growing, and I want to be a part of that growth."
On the strategic side, he says companies are likely going to pay a premium if they need the target's product, and/or they need the company as a bolt on to tie a lot of their systems and architecture together. But there needs to be considerations for the macroeconomic factors that those strategics are dealing with. If it's a strategic that has a lot of international exposure, then pay attention to the international politics because that's going to determine if the company can actually get a deal done.
For sellers, these trends mean more granule looks from buyers with a lot of what-if scenarios and sensitivity analysis. So buyers, Kessler says, need to be ready not just to sell, but ready for anything.
"I have the bus theory," he says. "And the bus is not the Good to Great bus. It's what happens if I'm investing in (someone's) company and a bus takes him out. I want to make sure that next level of management can run the business."
To mitigate this risk, CEOs and owners, he says, should try to make themselves irrelevant as fast as they can.
On the diligence side, Kessler says companies should have the gamut of financials prepared and ready for review — from cash to accrual to GAAP to Q of E.
"The further you can go up the food chain, the better in that regard," he says. "When we get involved in a deal, and they're audited financials, and we get that audit stamp, we're like, OK, we're dealing with a company that was really ready to go."Companies that have what he calls "lumpy revenue" need to be able to explain why that is. Those with lumpy GP and EBITDA should spend time solving that equation early on, because buyers are likely to penalize companies for that when they get to the end.
All the preparation today for due diligence is really about minimizing risk for the buyer.
"Think about all those things that could go wrong from macro to microeconomics and how you're going to address those in your business," Kessler says. "That gives the investors a lot more comfort when they're talking to you."
Sellers also need to weigh their options when it comes to marketing their business — do they target only financial buyers, just strategics, or both? Kessler says to figure that out, owners should do some soul searching to determine what they want. That could mean timing an exit with personal or family plans, as well as deciding if they want to continue to work in a business with a PE sponsor or even for a public company.
"If you love rev rec, 606 accounting and SOX compliance, that is your jam, you need to do that today. But if not, you need to consider your options. If you work with a private equity group, you can still have ownership and you can go for that second bite of the apple," he says. "There's a lot of different options for you based on your life situation that you're in, your family situation, and really what you want to be doing for the next five or seven years."
