Goering Center news: M&A in 2019

By Steve Faulkner

As we draw closer to an inevitable market downturn, merger-acquisition (M&A) activity in the middle market is anything but quiet. The business lifecycle continues to accelerate, creating both pressure and disruption for business owners and managers alike. Innovation across industries has fueled further competition across the spectrum. At a time when organic growth has been muted over the past few years, companies have been forced to explore more acquisitive opportunities in order to continue to hit their growth trajectories and stave off new competitive entrants, such as startups and/or financial sponsor roll-ups. This point is further illustrated in JPMorgan Chase’s 2019 Business Leaders Outlook survey, where a number of business owners have identified M&A as a catalyst for future growth. (See also JPMorgan’s Ideas and Insights article: Are you prepared for a downturn? Many may not be)

These trends are also driving opportunities. Owners and managers can expect calls from interested parties looking to grow and innovate through acquisition, partnership or joint-venture arrangements. The latest tax changes have resulted in repatriated capital and increased cash flows that have further boosted activity. In addition, increased growth in VC fundraising can potentially mean better capital raises with more flexible terms and lower dilution.

In the current environment, it’s important to stay focused on what you know and seek guidance for what you don’t. We continually observe that business owners completing the most successful M&A transactions do three things right:

1. Vigorously prepare their business to go to market
2. Have a clear conviction to sell
3. Move expeditiously to get a deal done

It’s not easy to stay focused on the growth of your business while preparing for a transition. And that’s where another critical factor comes into play: elevating the caliber of your team, both inside and outside the business.

Many nascent companies rely on an internal bookkeeper or an external accountant for financial recordkeeping, and only bring in a controller or chief financial officer when they are preparing to go to market. The delay may be shortsighted and more costly than the associated compensation expense.

Having a dedicated resource to prepare your planning, budgeting and forecasting can help you understand the quality of your earnings and deploy precious capital in a way that continues to build value. In an era of branding, hiring a controller or CFO also indicates that you have achieved a level of professionalism and governance that’s attractive to investors, customers, suppliers, competitors and interested acquirers.

The right CFO can support your transition strategy, helping you move toward an IPO or control sale to an acquirer. It is common for businesses to receive unsolicited expressions of interest after filing an S-1 registration statement with the Securities and Exchange Commission.

In addition to a dedicated finance team, savvy owners and managers will begin having discussions with external advisors early in the process to better understand the market cycle, valuations, cost of capital, exit options and any tax-advantaged pre or post-liquidity planning techniques. Early discussions allow you to gauge credibility and motivation of potential advisors in advance of a specific transaction such as a capital raise or unsolicited offer. Building a relationship over time lets you back-test the quality of the advice and should lead to a long-term, mutually advantageous relationship.

Even as we approach the late innings of the economic cycle, opportunistic entrepreneurs are making preparations by surrounding themselves with a multidisciplinary team of employees and advisors who can react quickly and strategically — and reap additional value as a result. It’s often said that you can’t time the M&A markets. Whether you plan to take advantage of the current cycle, or hold and transition in the next one, being well-positioned to transition when the time is right can make all the difference.

Steve Faulkner is the Head of Private Business Advisory at JPMorgan Chase, a Goering Center member organization.