A lot of work goes into building an equipment finance company. More work goes into preparing it for sale. Don’t let a selling decision based on price alone derail your merger and acquisition (M&A) plans, advises James Jackson in the latest issue of the National Equipment Finance Association’s Newsline.
The offer price is a major consideration when selecting the right buyer, but it is not the only one. Jackson, manager director and leader of The Alta Group’s M&A Advisory Practice, says there are several factors to weigh when narrowing down potential buyers.
What will the operating culture be like under new ownership? This is key because the owner often remains with the company during the transition period and sometimes beyond. The seller’s management team and loyal employees will also be affected. One question to ask is whether managers will be under increased regulations, controls and/or corporate scrutiny that will affect their decisions about credit authority, pricing and market segments.
“Knowing that the new owner will either approach business issues and challenges in a similar manner to a seller or will trust the seller to continue making operating decisions is critical to the success of the organization after the sale,” Jackson writes.
What competitive advantages does the prospective buyer bring to the table? There are several potential business benefits that sellers should evaluate before making a decision.
For example, some buyers are more attractive than others because they offer operational efficiencies and/or opportunities to increase originations. “A buyer that offers the company a low-cost, stable source of capital can potentially increase margins or provide access to new markets or higher quality credit customers within existing markets. A buyer that can provide the seller with a more sophisticated technology operating platform can improve operating efficiencies and customer satisfaction levels with respect to new originations or account servicing,” Jackson gives as examples. Access to the buyer’s back-office support services and business relationships are other considerations.
Understanding the reasons that a buyer is attracted to your company can help predict the long-term impact on the employees and business.
Jackson says some private equity firms, for example, come into equipment finance acquisition with plans to grow the company using its existing management team, then exit in a few years after the desired return on investment. Some banks want to leverage the seller’s established platforms and management teams to expand into equipment finance. There are also strategic buyers that want to enter new markets or offer new financial products with the aid of the seller’s reputation.
Selling price is important but so are the pricing structures used and the timing, both of which can vary widely.
Pricing structures are typically based on cash, the buyer’s shares, or a combination of the two. “[T]iming can range from being due entirely at closing, to a combination of some amount upfront with a portion contingent upon future performance through an earn-out arrangement. Some agreements may include a requirement that the owner roll over a portion of the purchase price into the new company, which provides an incentive for the owner to participate in the organization’s future success,” Jackson writes.
Confidence in the Buyer
Look closely at the buyer’s financial strength to determine if the company has the resources to complete the transaction.
Is the buyer capable of securing the needed capital and approvals? Completing the due diligence required for the sale? Closing the deal efficiently and within the desired timeframe? If the answer to any of these questions is “no,” further negotiations are a waste of energy and resources, he cautions.