The M&A market experienced a sharp decline in the first quarter of 2013 which, according to the New York Times, was the slowest six-month period for combining companies in the last four years.
But it does appear that things are looking up, with the second half of 2013 expected to be significantly more robust when it comes to M&A activity. If your company is considering a carve-out, now may be the best time to let go of any noncore assets. The September issue of Middle Market Growth highlights five steps to get the best value for an operation being considered for sale:
Think Like a Buyer
According to Braun Jones, managing director of Outcome Capital LLC., sellers should ask themselves what they’d like to know if they were interested in purchasing a certain business unit. Mr. Jones also believes that sellers must correctly assess what the strategic value of the business unit is in the eyes of multiple sets of buyers, and how to best position the asset.
SRA International director of corporate development and assistant treasurer Drew Drake believes that it’s important to identify the price hurdle and validate the data points against the market before devoting numerous resources to a divestiture.
It’s essential that sellers continuously evaluate their business units to determine whether or not they’re producing the returns they should, and that they remain aligned with the current corporate strategy.
According to Braun Jones, many lower middle-market firms lack a formal process for evaluating divestitures. “One should consider whether a sale or a spinoff is the best alternative,” says Jones. “In a spinoff, shareholders will maintain all or partial ownership. The tax consequences of these alternatives should be carefully considered.”
Companies just starting the process of doing a carve-out should know that it’s likely too late to get it done by the end of the calendar 2013 year. Tony Otten, CEO of Virginia-based Versar, a construction and environmental management company, believes that if you need to move an asset, identify a small group of buyers instead of running a full auction. While it may require additional research, it can work well in instances where a carve-out needs to be expedited.
Map it Out
Once you’ve implemented a process for divestitures, the next step would be to identify mission-critical tasks. Sellers should be able to define who the potential buyers are, that way the carve-out can be tailored to address their needs. Strategic buyers expect to easily identify where cost efficiencies can be gained, which is why savvy sellers should be sure to offer this type of information.
Julia Pulzone, former CFO of CodeRyte, claims that “Innovation and the need to gain access to the newest technology is a huge driver for many companies. There is tremendous value in having a complete package of materials to provide to prospective buyers. This will not only move the process along more quickly, but it will result in much less overall work for the team.
Know Your Team
In order to effectively accomplish a carve-out, sellers must ensure that their internal teams have the necessary expertise.
Having the right personnel plays a huge role in whether or not a transaction will happen, and that it will happen smoothly. While this won’t make-or-break a deal, it determines its efficiency.
Terms of Agreement
Sellers should plan on performing due diligence early in the process, “even before the buyer is selected”, according to Brooke Daniels of law firm Pillsbury Winthrop Shaw Pittman.
By doing so, you can determine what kind of assets and services need to be provided and negotiated into the transactional services agreement. Such a pact would layout what company is responsible for what and when after the sale has been closed.
To check out the latest issue of Middle Market Growth, click HERE