Today’s Robust M&A Environment Presents Challenges for Sellers

“You hit home runs not by chance, but by preparation.” – Roger Maris

There is no question that the flurry of M&A activity witnessed in 2021 has maintained momentum into the early months of 2022. Buyers with access to abundant capital continue to compete aggressively to acquire well-positioned companies. This “auction” process often results in premium valuations and splashy headlines that, in turn, catch the attention of other would-be sellers and ultimately produce even more deal flow. While we are all watching closely to see if geopolitical events and much anticipated rising interest rates will slow the pace of dealmaking, to date there has been no evidence that these factors are having a meaningful adverse impact.

There is one dynamic, however, that has increasingly become the focus of Amherst’s interactions with sellers of middle-market businesses. That dynamic involves the implicit expectation among buyers that while they may be willing to pay substantial premiums for businesses that are best-in-class, to the extent their due diligence reveals flaws in a seller’s business, the ultimate valuation will undoubtedly reflect those negative findings. Further, should any such flaws in a seller’s business be discovered by the buyer in the course of its due diligence rather than being proactively disclosed and mitigated by the seller, the result will be to stall the momentum of the sale process, which in turn, can often either undermine the valuation far beyond the actual “cost” to fix the problem or even derail the deal altogether.

At Amherst, we have watched this dynamic unfold and become more acute as M&A volumes have accelerated. Our response has been to significantly expand our efforts to prepare sellers by developing a comprehensive set of pre-sale due diligence activities. In addition to our in-depth examination of the seller’s business, these pre-sale steps involve some combination, as appropriate, of investigations by outside specialists, potentially including (i) a quality of earnings report, (ii) a market study, (iii) an environmental assessment, and (iv) a review of legal contracts and intellectual property, among others. The goal is to uncover any potential problems/issues before buyers are ever contacted, and of course, be able to address and mitigate those items. Done well, this preparation will minimize the potential for an unpleasant surprise once the sale process is launched, and at the same time, send a positive signal to buyers that the seller has essentially “de-risked” much of the buyer’s due diligence process.

Finally, just as there are no two businesses that are exactly alike, the same can be said about the process involved in selling a company. Each sale process is as unique as the business (and its owners) being sold, and working with professionals that understand and embrace those nuances is critically important. Engaging a team of experienced advisors early in the consideration of selling a business is often the key to keeping the process on track, lowering transactional expenses due to a more streamlined timetable with fewer surprises, and ultimately, achieving the seller’s desired end result.