Ingram's June 2022

Q: What kinds of things get in the way of that, for those sellers? A: If you’re going through a major tran sition, investing in an alternative market or product line, it can be difficult to convince a buyer of the vision and to fund it, prior to it being validated by the marketplace. Getting systems in place, grooming management, creating KPIs, and establishing consistent financial reporting are a few examples of tasks that need to be taken into consider ation in transitioning a business to craft a soft landing for all involved. A: At the end of the day, it really depends on who the buyer is and what the seller wants. Some sellers want every last nickel and then go stick their toes in the sand; others truly want to take care of and preserve the legacy of the business and take care of those who helped get to this point. It can be difficult to command both a premium valuation and preserve operational integrity post-closing, given buyers often want to do things their way. A strategic buyer is not as likely to care about the management depth or the staff if they are going to be transitioned. Private equity will be asking ‘Who are we buying? Who’s going to run this, and what are they capable of?’ Our job is to present the best strategic options; we do not get to vote on the merits of selling a business. Q: Any other thoughts? A: All of that said, strategic buyers or large corporations continue to be very active in the marketplace. They have tremendous amounts of cash available—$1.7 or $1.8 trillion, by the last estimate. Corporations continue to represent two-thirds of all M&A volume. The question is ‘Do I build this out under the current umbrella, or do I let someone else bootstrap and validate an opportunity, then step in and buy it?’ Corporations have op- portunities to build around syner gies that financial buyers just don’t have, thus benefiting selling business owners. Q: So in general, what shapes that soft landing?

recession or are we in one? How high will interest rates go? What will the labor market look like? And how tired, if you will, are those founders and CEOs? All of these fac tors dictate the timing to enter the market. Q: That’s a tough choice for people who have invested, in many cases, their working lives into an enterprise. The emotional part has to be a hurdle in this process. A: Transaction emotions are the most challenging aspect of a transaction to manage, considering the M&A process can be a roller-coaster ride. It becomes a ques tion of what you really want. Going back to the example of $10 million EBITDA vs. $14 million projected EBITDA in the next three years. That’s a big delta, but a lot can happen in three years, not to mention securing and managing the required investment to achieve the $14 million EBITDA. Owners have to decide whether the risk is worth it, and if not, pull the ripcord. Those questions are more common this year and likely will con tinue. No question, 2021 was incredible year from an M&A perspective, but when we hit that first speed bump in Q1 with higher inter est rates, inflation, the war in Ukraine, and other geopolitical pressures, the focus should have shifted to what impact this was going to have. If this question is not ruminating in the minds and strategy sessions of boards and executive leadership teams, it should be. A: Once sellers get the business to a point where it’s on a glide path and continues to growwith those operating the business, taking advantage of favorable M&A market dynamics in an efficient, timely manner is paramount. Once the emotional decision to pursue a trans action is made, time is of the essence. Q: Are the signals to a seller that the time is now changing at all? Q: And are the time frame changing for deal completion? A: Once a decision is made to explore the market, a transaction can generally be completed in five to seven months. There are a lot of variables that affect the timing, includ ing the availability of information, holidays, access to transaction advisers, amongst others.

Q: Within that older cohort, in par ticular, is there an increased sense of urgency to get something in the works? A: It is not a secret that we have been in a very frothy market from a valuation per spective. If business owners have not been enticed to pursue a sale in the recent market, it could be the result of incredible growth or other unique dynamics. We are continuously asked how sellers can be compensated for future growth potential in combination with how much longer the strong current M&A market will last. While there is no crystal ball, at the first sign of any headwinds, or as the headwinds get stronger as we have experienced recently, we are beginning to field inquiries around “Is now the time? Are things going to improve or get worse?” It will be interesting to see how things play out if the economic headwinds we are facing now get stronger. Are we going to have a “There have been, and continue to be, premium valuations associated with very squeaky clean, well-run A-quality companies.” — Bill Conway, managing director, CC Capital Advisors

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I n g r a m ’ s

Kansas City’s Business Media

June 2022