Selling a business takes time, meticulous planning and discipline for its successful execution. Expert dealmakers say it always pays to be prepared and that preparation often begins years ahead of inviting suitors to the table.
At the IIAC’s second annual Small Dealer Symposium: Strategies for Success in the New Financial World, industry veterans shared some strategies for clinching that dream M&A deal.
Map out a strategy as to who your likely buyers would be and incorporate that in your business plan, says Kish Kapoor, president of Wellington West Holdings, which was acquired in May by National Bank of Canada in a $333 million deal.
“Every single thing we did in 2006 was to ready ourselves for that event,” said Kapoor. “We started writing annual reports, we started introducing transparency in our information [and] made sure we allowed our people to understand exactly how our firm would be valued if we went public or if we got sold.”
He published the company’s valuation methodology on a quarterly basis. “That gave us huge amount of discipline in focusing on the key drivers, and getting all the 600 employees focusing on the key drivers, because their shares ultimately were priced based on that methodology.”
It all started four year before the actual deal, with the alignment of every employee with the end goal. “I’d talk to them almost every month about how we were doing against that benchmark.”
Speaking at the Advisor Group’s 2011 Distributors’ Summit, Chris Reynolds, CEO and President, Investment Planning Counsel Inc., discussed where the distribution business is likely to be five and 10 years from today.In 2008, Wellington West was able to inspire National Bank to buy 12.5% stake for $38 million cash.
“That relationship worked out well; National Bank understood who we were, we got to know them a little better and when the time came to sell this business it was very easy for both of us to understand what our business was worth,” said Kapoor.
Kapoor’s advice to prospective sellers is to plan at least three to four years in advance and execute against that plan. In other words, start with end in mind and work backwards.
“The worst nightmare is when [you realize] you want to sell tomorrow and start preparing today; that is a complete recipe for disaster,” he said. “In every business that I have ever had or built, the plan starts usually three or four years [ahead].”
Priming a firm for a potential takeover bid is a painstaking process. It’s important to be doing all the right things so the firm is in top shape by the time you get to the negotiating table.
A sophisticated buyer will examine your statements carefully; don’t misrepresent anything. The level of scrutiny that comes from the buyer is exhaustive. The business’ data must be impeccable.
Kapoor kept things squeaky clean. “When the buyer came in they couldn’t find a contaminant that they [could] apply to discount [our] price.”
That process, says Kapoor, doesn’t come by accident. “It was very disciplined process to get it ready [but] you need to do that,” he said. “The hardest part is to understand that every business has a ‘best before’ date and you have to come to terms with that. You have to have a succession plan in mind well before the event actually transpires.”
Ultimately most of these businesses get sold, said another expert on the panel Neil Selfe, managing director at GMP Securities.
“So look forward and plan who the likely buyer is and where you are going to drive the most value for those component parts of your businesses.”
The regulatory burden has increased significantly, as has the complexity of running a dealership. The banks have introduced a new cost structure in terms of what they will give an investment advisor for shifting a book to the bank. Selfe says this means for dealers to be successful they ultimately have to have scale.
“When I look at the traditional retail businesses, still the most attractive candidate to buy those businesses are the banks,” says Selfe. “But to get a premium valuation for those businesses, they have to have a fair degree of scale.”
Banks won’t become terribly interested until a dealer has AUM north of $5 billion, a point where it can achieve a premium valuation.
It is also a good strategy to have a clear focus area of business. Things get complicated when a firm has both capital markets and wealth management components in its business. The natural buyer of the wealth management business may or may not put any value on the capital markets business, says Selfe.
“If the buyer is a bank, it’s highly unlikely they’d put any value at all on your capital markets business; if it’s an asset manager, it’s highly unlikely they’re going to put any value on your capital markets business.”
Foreign banks coming into Canada are more likely to put value on the capital markets business, but not on the wealth management side. Selfe attributes this selectivity on the part of foreign buyers, especially U.S. banks, to incompatibility between small broker-dealers in Canada and the big U.S. systems.
Finding a buyer that will put a premium on both is very difficult, he added.
Finally, doing a deal isn’t really an endgame. It’s a starting point.
“The selling of the deal and executing on the deal, doing the operational integration, successfully holding the advisors and assets” are critical elements of a successful M&A transaction, Selfe said.