Mastering the M&A Landscape: The Art of Sell-Side Readiness in Today’s Challenging Market 

Everyone’s waiting for M&A to pick back up in 2024. When the time comes, are you ready to take your portfolio companies to market?  

Today’s financing and economic environment has created unique challenges for private equity sponsors, prompting management teams to be more prepared than ever to run a successful sales process and maximize exit value. Expert sell-side readiness can unlock the path forward. 

Market Conditions 

Sellers are confronting a market landscape characterized by uncertainty, limited financing options, and cautious buyers hesitant to commit capital. While the Federal Reserve has signaled a pause in rate hikes, there’s still a scarcity of available credit and a steep cost of debt. In 2023, this environment led to a decrease in transaction volume, depressed valuations, and intense scrutiny from lenders and buyers on assets that did trade.  

• Private equity sponsors have increased their equity contributions, which in some cases surpassed 50% for the first time in 15 years. Additionally, hold periods have been extended, and distribution rates have fallen to their lowest levels since 2009.  
• According to a recent Fund Performance Report from Pitchbook, private equity funds reported a modest return of 0.27% in Q3 2023, compared to the 5-year average of 4.33% and the low to mid-teen returns in late 2020 and early 2021.  

But the outlook is not all grim.  

The economy has weathered rate increases better than expected, employment is strong, and overall growth has run well above trend. That shift in sentiment, together with the growing pressure to deploy dry powder, will likely cause dealmaking to pick back up in 2024.  

That said, buyers and lenders will likely remain cautious. Assets that come across as more mature and well-prepared will likely stand out and receive more bids and higher valuations.  

Challenges Companies Face in the Sale Process 

Given what’s known so far in 2024, what’s standing in the way of a positive sales environment?  

For one, knowing that PE-backed platforms are utilizing buy-and-build strategies, it’s incredibly critical that unintegrated technology systems and processes don’t create undue challenges during diligence. Bidders desire cohesive datasets and effectively managed dataflow and communication. At this stage, data quality will shape buyer perceptions of the asset and the level of risk involved with operating the asset post-close.  

More specifically, the top five things that give buyers pause when evaluating a target are: 

1. Lack of add-on and system integration: Platforms that have grown inorganically often face challenges in integrating add-ons from IT, finance/accounting, and operational perspectives. In such situations, buyers expect significant corporate infrastructure investments post-close, which affects the price they’re willing to pay for an asset. A complex or sub-optimal tech stack and financial reporting structure also make the diligence process longer, more painful, and less efficient for both sides. 
2. Poor data quality: Limited visibility into key performance indicators (KPIs) and contradictory datasets can undermine the equity story. And incomplete or inaccurate financial records erode confidence and trust.  
3. Key talent gaps: Open positions in critical areas of the business often mean there’s no one to adequately respond to operational or financial questions raised during diligence.  
4. Executive turnover and lack of preparation: Recent executive turnover often results in a new management team that’s not able to speak to the company’s historical performance.   
5. Legal and compliance issues: Unresolved legal or compliance issues can be deal-breakers, or, at minimum, delay deal close and impact valuations.  

Given recent shifts in the M&A landscape, both PE and strategic buyers expect a level of sell-side readiness from potential sellers. In 2023, assets were taken to market only to receive no bids or to have potential buyers withdraw from the process after encountering challenges or identifying risks in diligence. 

 

Exit Readiness: Best Practices for a Successful Sale Process 

Leading PE sponsors initiate the sell-side readiness process 12 to 18 months before engaging bankers or sell-side diligence advisors.  

This process entails mapping out risk areas and building a roadmap to address them. The roadmap should identify priority workstreams, clearly assign ownership, and include a timeline for addressing each risk area.  

Best practices for sell-side preparedness include: 

• Deal PMO: Identify a member of management or the deal team with primary responsibility for the deal process and who’s accountable for timelines and deliverables. 
• Document repository: Prepare a repository of important customer, supplier, and related-party agreements to demonstrate transparency and facilitate population of the data room. 
• Strategic Initiatives: Prioritize commercial or restructuring initiatives that maximize exit value and contribute to a smooth, timely exit process. 
• Key talent management: Address key talent gaps and key person risk by providing retention bonuses or long-term equity incentives to executives. 
• System integration: Evaluate the level of system integration – enterprise resource planning (ERP), enterprise risk management (ERM), and customer relationship management (CRM) systems, for instance – across business segments and create a roadmap for future integration activities. Determine which aspects of the tech stack optimization effort should occur before going to market and which technology investments can be completed within the available time. 
• Reporting best practices: Implement best practices in FP&A, accounting, and financial reporting well in advance of going to market. That will allow the company to present “clean” EBITDA numbers with a limited number of adjustments and to be able to respond to updated financials and buyer requests quickly. 
• Finance and accounting bandwidth: Recognize the pivotal role of these functions during a sale process and ensure sufficient bandwidth and external support where needed. 
• Data preparation: Calculate and track analytics illustrating the economics of the business and margin-drivers. Be prepared to respond to in-depth questions and provide transaction-level support for all materials shared with buyers. Don’t assume investment bankers will have primary responsibility for data gathering and analysis. The company’s FP&A team should play a leading role in this process.  
• Control the narrative: Prepare to explain unfavorable trends in the data to maintain control over the narrative and provide additional support. 

That list may seem daunting, but making it a priority within a year of sale allows ample time for preparation. Forward-thinking sponsors who invest in comprehensive sell-side readiness consistently complete successful exits and accelerate time-to-value even in the most challenging economic conditions.  

To get started on your sales journey, contact Biovell .