Common Founder Questions about M&A

By Cory Salmela, Founder

Questions Founders Around M&A

I speak to several Founders every day and I’ve compiled a list of the most asked questions about selling a company. This week we will explore a few of those questions.??

The Most Important Question: “What do Buyers Want?”?

There can be a lot of nuance to the answer, but if you keep it simple the top 5 list would look something like this:

1. A Well Run Company: Companies that are strong operationally will be attractive to buyers. It doesn’t need to be perfect, but decently functional will do. Investors will look for documented processes and procedures, strong internal controls, scalable systems and technology infrastructure, and clear organizational structure.
2. Record of Profitability: The majority of buyers are private equity investors. EBITDA is at the center of all deals. The financial mechanism for PE is cash flow. A general rule-of-thumb is multiples increase the larger the EBITDA. Additionally parameters include quality of earnings (recurring vs one-time), customer concentration risk, working capital efficiency, and capital expenditure requirements
3. Growth Potential: Investors will look at the products and services mix wanting to see a trend in increased demand. Other parameters include market size and growth rate, competitive positioning, barriers to entry, and intellectual property or other competitive advantages.?
4. Merger Friendly: The PE roll-up thesis combines complementary companies either through product & services, geographically or client/customer mix.? Investors will also consider technology stack compatibility, culture fit potential, integration complexity and synergy opportunities
5. Strong Leadership & Bench: Various leadership scenarios in a merger or acquisition are as varied as the number of deals. They are all unique. Investors are looking for a couple key things. Is the Founder open to staying with their company? If not, is there a strong number two in place? Investors will also evaluate key person dependencies, depth of middle management, employee retention rates, and succession planning

When selling a company, buyers (particularly private equity investors) focus on five key attributes: operational excellence, proven profitability with emphasis on EBITDA, demonstrable growth potential, merger compatibility, and strong leadership including succession planning. These elements form the foundation of an attractive acquisition target, with each factor contributing to the company's overall valuation and desirability in the marketplace.

A Top 3 Question: “How are multiples determined?”?

Life Sciences Services companies typically trade at higher multiples than the general market. Current industry multiples range from 8-14x EBITDA. Companies with higher recurring revenue usually command higher multiples. Companies whose EBITDA is below $1-2M can expect a lower multiple outside the range, but there is still an appetite for smaller companies in the current market.

We can expect higher multiples within the range for companies with strong digital capabilities, proprietary technology/platforms, higher proportion of retainer-based revenue, and specialized therapeutic expertise

Where a company fits into this range is determined by several factors.?

Revenue Quality

• Length and scope of client contracts
• Client retention rates and relationships
• Revenue concentration (dependency on top clients)
• Mix of project-based vs. retainer revenue
• Geographic and therapeutic area diversity

Operational Metrics

• Employee utilization rates
• Staff retention (key in knowledge-based businesses)
• Project win rates
• Average project/client value
• Operating margins (typically 15-25% for mature companies)

Strategic Value Elements

• Specialized therapeutic area expertise
• Proprietary data or analytics capabilities
• Cross-selling potential across services
• Digital transformation capabilities
• Global reach and scale

How are Deals Structured?

How deals are structured vary greatly, but in general Founders are offered part cash and part equity. Private Equity likes to see Founders who are excited about retaining equity, participating in the growth of the new company.?

At their core, private equity (PE) deals typically use a combination of equity and debt financing (leverage) to acquire companies. Here's how they're usually structured:

Capital Structure:

• Equity: The PE firm puts in 30-40% of the purchase price, using funds raised from limited partners (institutional investors, wealthy individuals)
• Debt: The remaining 60-70% typically comes from various forms of debt

Ownership Structure: The acquired company is typically held by a holding company owned by:

• PE firm: Usually maintains controlling interest
• Management team: Often required to invest alongside PE firm ("skin in the game")
• Other co-investors: Sometimes includes limited partners with direct investment rights

Exit Planning: The structure typically contemplates an exit in 3-7 years through:

• Sale to strategic buyer
• IPO
• Sale to another PE firm (secondary buyout)

Management Incentives:

• Stock options or direct ownership stakes
• Performance-based earnouts
• Management fee arrangements

Corporate acquisitions have similar elements without the second and third equity events. They tend to be all leverage and all cash.?

I will explore several other Founder questions in the next post.?

Cory Salmela

Founder & CEO?218-590-4448

[email protected]

meetsalmela.com

About Salmela:

Salmela is a Talent Advisory Firm.? From Growth Services to Executive Search to Fractional Talent Acquisition, Salmela is here to help our clients plan for and execute growth, acquire and sell divisions and companies, and connect companies with permanent hire and fractional talent.