Tips From Recent Sellers and Buyers
M&A activity is at a very high level in the PCB and EMS sectors, as well as in most sectors of the economy. We recently talked with a wide variety of buyers and sellers and scribbled down some of their insights (names not given due to confidentiality).
1. Keep the BS meter active
As my grandfather used to say, “If it smells like BS, it probably is.” I am not saying that sellers or their representatives lie, but they may engage in overly positive enhancement of the facts. There is a reason why many buyers include escrow in their deals, even after extensive due diligence: sellers sometimes enhance the facts and sweep issues under the rug. Or they might not know that there are major issues with the business. If the facts do not seem to add up, a buyer should be ready to dig in more, reduce the price and/or increase escrow, or walk away.
2. Prepare, prepare, prepare
Sellers should prepare, then prepare some more. After they think they are finished preparing, they should listen to their advisors and prepare some more. More than ever, buyers are seeing more deals and are able to hire more consultants from anywhere in the world. Each consultant needs to find something wrong with the business, or at least ask 50 follow-up questions after the initial 20 questions. The more prepared the seller is, the better they can satisfactorily answer questions that come up or deal with issues that they discover while preparing.
3. Use independent consultants to improve and prepare business
When selling a house, the owner usually hires an inspector to find out what buyers will find out about the house. Many owners also slap on a coat of paint, cut the grass, and bake cookies before the open house. A business owner can hire consultants in advance to prepare the business for sale, and who knows, they might find things that can improve the business’ performance. The advisors should have experience in the industry, although sometimes what works in the donut industry can work in electronics too. Each $1 improvement in profits (or adjusted EBITDA) is multiplied by something like 5X+ when the business goes to market, so an investment in business improvement can really pay dividends.
4. Don’t overpay
This sounds like a statement from Captain Obvious, but it’s a fine line between paying too much and paying enough to entice a seller to do a deal. If a deal works out in the end, a buyer may have paid a high price and it turned out to be a bargain. For some stinky deals, even at $1 the buyer may have paid too much. Buyers usually overpay in two scenarios: when expectations are too high, and when a deal seemed like a bargain, but it turned out that there were more issues than anticipated.
5. Don’t drive too hard of a bargain
We have heard this from both buyers and sellers. We can keep pushing for each extra dollar or for better terms, but eventually the other side gets tired. Most deals require that the two parties work together for some time after the transaction is finished, so any ill will created while negotiating the deal could spill over to the transition period. Often, it is best to settle for something in the middle and split the baby rather than push too much and kill the deal.
6. Communicate
Communication has taken a back seat during COVID, as we have curtailed in-person visits and focused more on zoom meetings and calls. It is better to overcommunicate than to let the other side guess about your intentions. Stay as open as possible and stay in touch.
7. Know when to pull the ripcord
Whether early in the process or late, it is better to walk away barefoot than to cram into a bad shoe. Sometimes, the best deals are the ones you do not do.
8. Really get to know the other side
Especially during COVID times, we often finish deals without really getting to know the other side. It is good to have several meals together and some other type of off-side event before jumping into a deal. The more you get to know the other side, the easier it is to work out any issues that come up as well as determine if you can work together well after a deal is done.
9. Be clear about post-deal expectations and responsibilities
Too often, both parties focus so much on getting the deal done that they do not really discuss how to work together afterward. Because integration is key, leaving it to figure out later is not a great strategy.
10. Keep forecasts realistic
A seller usually gets dinged more for missing forecasts than credit for beating them, so it is usually best to be somewhat conservative. If a large part of the deal is deferred compensation based on performance, hitting those numbers will be crucial.
This is some of the feedback we have received over the past year or so on our various projects. Hopefully, we can start meeting more in person, have a few beers, and get some more colorful feedback in the coming year.
Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.
