8 Takeaways from the AWA Executive M&A Forum

Recap: Deal Flow in a Post-COVID Environment

Corey Reardon, President & CEO of Alexander Watson Associates, did an excellent job programming an online version of their informative event, typically held live in Chicago. I was honored to moderate a discussion on post-COVID deal flow. Thanks to the following experts who participated in this panel:

Zach Jackson, Principal, P4G Capital Management LLC

Damon Thomas, Director, Mason Wells

Nick Mockett, Corporate Finance, Moorgate Capital

John D. Emory, CFA JD/MBA, President, Emory & Co., LLC

Michael K. Pearson, Principal, Michael K. Pearson Consulting

→ To see what these experts had to say, watch the recording.
→ Visit the AWA website to learn more about their services and when and where the next M&A Executive Forum will be held.

The discussion I hosted on Deal Flow in a Post-COVID Environment as part of this year’s AWAVirtual™ Mergers & Acquisitions Executive Forum, generated plenty of insight and thoughts on the mergers and acquisition process in the post-COVID era. Here are eight key takeaways from this excellent event.

1. A lot of consolidation has occurred among the biggest global companies. But the middle-market (companies in the $50 to $100 million range) is still fragmented.

This doesn’t mean that packaging companies that serve local markets can ignore the consolidation among bigger companies.

Consider what might happen if a big, global serial acquirer buys one of your local or regional competitors. Having access to capital will give your local competitor a huge advantage in terms of growth and modernization.

Instead of being reactive, be proactive about growth. Think about how you can grow your company through value-added services, vertical integration, unique business models, new niches, or geographic expansion. Strategically growing your company will help you create more opportunities when you are ready to sell.

2. A number of deals may close before the end of 2021, because owners are concerned about potential changes to capital gains and estate taxes.

The companies that close deals in 2021 probably started thinking about possible exit strategies long before 2020-21.

Instead of rushing to react to sudden shifts in politics and economic conditions, smart owners develop relationships with potential acquisition partners years before they are ready to sell the business.

These long-term relationships help set your business apart from the pack and may give you more options to make a deal when you feel financially and emotionally ready to sell.

3. Not all investment groups are the same.

When building relationships with different types and sizes of investment groups, you will discover that each group has slightly different objectives and acquisition criteria.

Whereas some investment groups will add high levels of expertise in finance and business management to your organization, other groups plan to achieve growth through process efficiencies and operational excellence. For example, Zach Jackson of P4G Capital Management LLC explained that the P4G investment group includes former entrepreneurs, engineers, and operators. They specialize in bringing long-term growth to manufacturing, infrastructure, industrial, and business service companies.

The primary benefit of developing relationships with potential investors is that when you do sell the business, the post-sale integration process is more likely to succeed. The more you learn about potential investors, the less likely you will be to sell your company to people who don’t share your values or appreciate the culture you have built up through the years.

When it comes down to it, selling your business is about more than a financial transaction. Instead of trying to squeeze every last penny from the investor for your own financial security, think about how the sale will affect your leadership team and employees. Find an investment partner who respects the business you have built and will carry on your legacy.

4. Business owners should keep up with advances in sustainability.

Panelists agreed that the lack of implemented sustainability measures probably won’t be a deal-breaker in 2021. But it may become increasingly important in the years ahead.

According to research done by Mazzone & Associates, about 25% of the global packaging M&A transactions in 2020 included a sustainability motivation. Mazzone expects the percentage of transactions with sustainable motivations to increase as brand owners respond to consumer demand for packaging solutions that fit eco-conscious trends.

In transactions completed in 2020, companies that had implemented sustainability measures earned a premium for the added value.

Participants in the sustainability panel discussion acknowledged that sustainability is a complicated subject. But it is driving a lot of innovations.

One panelist suggested that business owners should remain aware of what sustainability issues the company currently faces and actions that can be taken to effect meaningful, lasting changes.

Although fiber-based packaging is unlikely to totally replace plastic packaging, business owners should offer customers at least one choice between traditional plastic packaging and packaging that is more recyclable, biodegradable, or reusable.

Companies that have developed “closed-loop” solutions for recycling and reuse of their products are better positioned than those who haven’t yet acted on sustainability.

5. Branding and marketing can influence the buying decision.

If your shop hasn’t updated its branding and marketing in a while, it can affect how you are perceived by a buyer. An outdated website makes it difficult to convince a buyer that you are a forward-looking, growth-oriented enterprise.

6. Sellers need to know their numbers and be prepared to act decisively.

Many potential deals may start with a conversation between CEOs. But problems arise when sellers can’t quickly provide many of the details a prospective buyer might need to proceed with an acquisition.

One panelist urged sellers to “Stop doing all your financial planning on the back of an envelope. Have a professional ERP system, accounting system, and audited financials so you can show a potential buyer that you are keeping track of your business in an organized, professional way. Some sellers are embarrassed to admit they don’t really understand why their companies are profitable.

Private-equity firms also believe sellers should get unbiased, independent education about what to expect during due diligence and other phases of the M&A process.

Hiring outside M&A experts is also critical because business owners must continue to focus on running and growing their business until (and sometimes after) the deal closes.

7. Acquirers will say “no deal” if owners haven’t accurately described the strengths and weaknesses of their business.

It’s important for owners to be truthful from the start. Any weaknesses that the owner tries to cover up at the beginning, will come out during the due diligence process

The best acquiring companies sort through numerous potential deals every year. So they have professionalized the due diligence process, so they can quickly determine which deals are worth the time and effort to pursue.

Some business owners are shocked when they see how extensive the due diligence process will be. One forum panelist advised owners to imagine that a big company has asked you to fill out a questionnaire that evaluates whether you are qualified to become a vendor to them. This can be good practice for what a due diligence process might entail.

8. Post-COVID resiliency matters.

Investment groups understand that 2020 was a very tough year for most businesses and their customers. While not all companies were affected equally, investment groups will understand if your 2020 revenues took a hit.

What they will evaluate is whether your company took to minimize losses and restore an upward trajectory. If you were affected by disruptions in your supply chain, what steps has your business taken to prevent the situation in the future? How well was your management team able to handle an unexpected crisis such as COVID?

Forum participants agreed they are seeing an uptick in M&A activity. The experts on my panel were confident that many good deals can still be found by both business sellers and acquirers.

How We Can Help

At LaManna Consulting Group, we offer M&A education related to the packaging, labels, and specialty graphics businesses.

We believe it’s important to have an independent business valuation as well as trusted legal and tax advisors with experience in M&A processes. As an entrepreneur/owner, you must decide whether you want to stay involved with the company, pursue other ventures, or retire and sail happily off into the sunset.

Call me at 561-543-2323 if you have questions about the business matchmaking process the LaManna Consulting Group uses to help owners who are ready to sell find the perfect investor.