This is Why You Need to Optimize Management During M&A

As former VP at Huron Capital, Mark Miller is very familiar with the start-to-finish private equity process. He’s responsible for transaction teams involved in all aspects of deal sourcing, execution, and portfolio management. Mark has a wealth of experience executing deals on the buy side – managing due diligence, negotiating legal documents, setting the ultimate capital structure, and lining up financial documentation.

Every deal is different, but according to Mark, one of the worst things that can happen in any deal process consuming the management team of the portfolio company.

If management loses focus, it takes their attention away from managing operational and financial performance. “When you have performance over the course of the sale process that does not meet the expectations of the advisors or buyers who are participating in that process, that creates wrinkles that can be quite challenging at the end of the day.”

To be clear, the management team should be involved in creating marketing materials and attending management presentations with buyers. At the same time, an effective advisor and deal team should ensure the management team doesn’t spend too much time on transactional activities.

The management team is there to guarantee “the operations of business and underlying financial performance continue to be strong. Those fundamentals are the building blocks and key to a successful outcome and investment.”

Another way to avoid overburdening management is to work with advisors who not only have expertise in mergers and acquisitions, but specialize in your size market and industry.

In his role with Huron Capital, Mark targets advisors with core expertise in lower-middle and middle markets, avoiding larger investment banks. Huron Capital typically interviews 2 to 5 banks to analyze their valuation alongside the support and justification provided.

There are several factors involved in determining the best fit and assessing advisors. “Valuations are important – you can’t get around it – but it needs to pair well with certainty to close.”

As a sanity check, Huron Capital prepares their own valuation to analyze valuation soundness and alignment. An outlier on the high side may not be realistic, but an outlier on the low side should not be ruled out if it presents strong support.

“Valuations are important – you can’t get around it – but it needs to pair well with certainty to close.”

Mark also looks for a customized exit plan that takes advantage of the unique business opportunity they’ve created. This can add value in the process. At Huron, they plan for an exit on day one.

Not to say their focus is on a quick exit, but they begin their long-term strategic planning process – often a 5-year plan outlining initiatives – right from the start.

“You need to have a story and a position in place and if we’ve been successful in executing our strategic plan. By the time we exit an investment, we still have a number of growth opportunities, whether it’s organic or through acquisition, for our portfolio company to capitalize on under…new ownership.”

It is key to refine elements of the story that tell the marketplace why the underlying business will continue to grow its revenue and cash flows.

But how do you know when to sell? “When you feel really good about the pieces of the puzzle and how they’re fitting together at that point in time, that’s when we can begin the process of really engaging with advisors who can market the business and ultimately run a sales process.”

What would you do to take transaction work off management's plate?

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