What is a “Deal Ready” Company?

By Ken Taormina

There are many good articles and papers on what a Deal Ready company is available on the internet.  What I want to focus on is my experience and our firm’s experience on the reality. Using a few examples of real live clients (both sellers and buyers) of what is not a “Deal Ready” company and how one that is not can be turned into one that is. 

The reality is most middle market companies that buyers target have not participated in a sale or an acquisition. The owners (Founders, Partners or Family) have been spending most of their time focused on their business and making it grow. Their knowledge of M&A is through colleagues or hearsay at the country club.

Founders tend to have very strong egos that are needed to build a company from scratch, so they have not always built strong teams with leaders in key positions (Sales, Finance and Operations) who are ready to move up if they are acquired. There are seldom meaningful succession plans in place. Consequently, when buyers are determining their interest, especially PE firms who don’t usually have the key people to replace the leadership, they insist on longer earn-outs and less cash up front in the deal. This then meets big egos with high expectations and little real-world perception of a company’s true value. 

One company I acquired, a combination Aerospace Software and Products Manufacturing firm, had a strong CEO but he was also the key Sales Executive that held all the relationships with the firms that provided 80 percent of the company’s revenue. The Finance Chief was a glorified bookkeeper, and this was a company doing 12% EBIDTA and had substantial revenue and growth. This not only affected our view of offering a lower valuation but also allowed us to tie the founder down to a 3 year stay and a 3 year earn-out when it could easily have been a year earn-out and a year stay in his role during transition. 

A similar firm in Cyber Security had prepared for several years for an exit. The CEO and Co-Owner had built a strong team with an experienced President, CFO and VP of Sales.  He had developed a flat organizational structure with a strong succession plan that was clearly delineated during pre and post due diligence. The books of the firm were audited yearly by a CPA firm.  The overhead of the firm was kept low, and the pipeline of new business was 3x current revenue, and the backlog was 3 years of revenue with a predictable recurring revenue and happy clients. The EBIDTA was 14% and there was $2m of cash on hand and no debt. This was a very easy and quick acquisition because the leadership took the time and effort to prepare themselves for an exit well in advance. Certainly, “Deal Ready”.

Another mid-market company was family owned, had awards and many long-term satisfied Fortune 1000 clients with recurring revenue. However, they didn’t have auditable books, working accounts payable, an accounts receivable system or a compliant inventory. They were an excellent firm, but the family had left the management of the firm to incompetents.  

When we got involved it was clear that all the problems were fixable, but they would not be selling the firm any time soon. After 1 year and a new competent CFO was hired, they put in place a formal accounts payable process, regular accounts receivable collection with KPI’s and a full audit of Inventory which cleared up $1.5 M in missing inventory. Other key items such as renegotiating their debt, hiring an experienced Sales VP in their industry, building a succession plan for CEO and COO and outsourcing part of their service team took them from 5% EBIDTA to 12% EBIDTA and ready for sale or a buy out from their two sons. This company was then “Deal Ready”.

For Sellers to maximize their valuation this is a list of the key areas they must focus in on early for success.

·      Strong Organizational Structure and Governance

·      Strong Talent and a good retention plan for key players

·      Auditable Books

·      Recent Independent Valuation of the company

·      Strong planning, budgets and KPI measure for the business

·      Documented Process for the operations of the business

·      Good control pf AP/AR and Inventory

·      Technology upgraded IT and an up-to-date Cyber plan

·      Strong Advisors in M&A, Law, Banking, Tax, and Consultants

·      Deep Brand Exposure in your Industry both in networking, clients, on-line presence

All of these key actions when ready will lead to a much easier search for a buyer, multiple potential buyers, a swifter due diligence and a successful sale with a higher valuation for the Seller.  A true “Deal Ready” company.