How to Avoid Costly Mistakes When Selling Your Company

An Interview with Harald Maehrle, Mummert & Company – Part II

Harald Maehrle, Managing Partner, Mummert & Company

Harald Maehrle

This is the second part of an interview with Harald Maehrle, partner at Mummert & Company, a leading corporate finance consultancy firm headquartered in Munich.

In the first part, Mr. Maehrle shared his perspective on the exit situation in the European technology sector. Now we’ll focus on the stages of the M&A process and what a company’s leaders can do to prepare for selling their company.

Barbara Hoisl: Let’s look at a practical example: a small software company senses that it might be approached with an acquisition offer by one of its large enterprise partners. What should the company do in this situation?

Harald Maehrle: In a nutshell: engage the best advisors you can afford, it will pay off in a better outcome.

In the case of a small cash-strapped company, as the absolute minimum, it needs to engage a lawyer specializing in M&A deals to oversee due diligence, and to negotiate and prepare the contracts. That would be already well into the M&A process.

However, it is strongly recommended to engage a corporate finance/ M&A consultancy like us much earlier in the process – ideally when the company is first approached.

If a small company really can’t afford an M&A consultancy, as a fallback, they might look to find at least a mentor who has actually been through an M&A process, for example someone from their board. If you do something for the first time, you will make costly mistakes, and you wouldn’t want to make these mistakes in such a high-stakes, one-time transaction.

Q: If a company is aiming for an exit through M&A, what can the company do proactively to optimize the outcome?

Harald Maehrle: There are a couple of things the company can do proactively.

Reduce the risk for potential buyers, so that it is easier for the buyers to commit, and for the company to get a higher valuation. Risk can be reduced by increasing recurring revenue streams versus one-off revenues, by putting processes and documentation in place that ensure business success without the ongoing involvement of the owners, founders, or other key individuals, and by avoiding undue dependency on just one or very few big customers.

Build relationships with strategic buyers: Strategic buyers usually don’t buy companies they don’t know. Therefore, I recommend proactively building relationships with those companies that might be possible buyers. This could be through some form of business partnership or alliance. Strategic buyers are often bigger companies with multiple business units. In this case, it is important to target the right business unit: ultimately, for an M&A deal to go through, it needs to be supported by a business owner on the buyer’s side – and this is the head of the business unit that your company would be integrated into after the M&A deal closes.

Strive to create a bidding contest, i.e. lining up multiple potential buyers. Proactively building relationships to multiple strategic buyers helps with that, as does using an experienced M&A consultancy who will professionally market your company.

Q: Since you mentioned professionally marketing the company: can you provide a quick overview on the M&A process?

Harald Maehrle: Sure. The M&A process consists of four phases: preparation, contacting prospective buyers, due diligence, and contract negotiations.

In the preparation phase, the M&A advisor creates the materials required to market the company, most importantly, the detailed memorandum of information, and researches the list of potential buyers – strategic buyers as well as financial investors.

In the next phase, we contact the identified potential buyers. If we get indications of interest that meet the seller’s objectives, we move on to the due diligence phase.

During due diligence, the potential buyers do an in-depth examination of all aspects of the seller’s business. This phase closes with one or multiple confirmatory offers.

If confirmatory offers meet the seller’s objectives, we then move on to final contract negotiations which hopefully lead to a signing and closing of a transaction.

Q: In your talk at the technology day, you also stressed the importance of picking the right time for selling a company. What are some rules and guidelines to keep in mind here?

Harald Maehrle: Well, if you look at statistics for the European M&A market, there aren’t that many transactions with an acquisition price above 100 Mio €. The median price for European M&A transactions is well below 30 Mio €. Especially for a strategic buyer, it’s just easier to get the necessary approvals and to push an M&A deal through internally if the acquisition price is in the range of 10 – 30 Mio € instead of 100 Mio € or more.

Another consideration is that the best price can be achieved when the company is still growing fast and has a lot of “future promise” to sell. There are multiple prominent examples of companies, even in the US, that declined acquisition offers during their growth years, betting on getting an even higher price in the future – only to see their valuations drop and never recover.

For both reasons, it is better to sell earlier rather than later.

Barbara Hoisl: So, in today’s market, M&A could be an option for companies much earlier than they might expect. Thank you very much for sharing these insights!

Mummert & Company is a leading international corporate finance advisory with offices in Munich (Germany), Vienna (Austria), London (UK) and Princeton (USA).
www.mummertcompany.com
Managing partner Harald Maehrle can be reached at maehrle@mummertcompany.com.

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