By: Duane Donner
When a business owner is considering selling their company, it is likely that one of the options available will be merging with a similar company in an adjacent market. These types of transactions can be the best option to consider from a valuation perspective, but there are various other factors that need to be considered over and above those in a traditional recap with a private equity firm or outright sell. Below are some of the financial and personnel considerations that should be considered when going through a merger process.
- Both companies will need to be independently valued to determine shareholder ownership in the combined company.
- The capital needs of the combined entity will need to be determined, and it will be important to know how the transaction would be structured, with debt or equity.
- It is important to understand the financial forecast of the combined entity and the exit strategy going forward.
- The key stakeholders will need to know the tax burden due to the transaction.
- Who will lead the company going forward and what is the strength of their leadership?
- Do they plan to operate the company as two separate brands/entities or do they plan to integrate them into one brand/entity going forward?
- What will be the communication plan to the staff to retain employees and maintain morale?
- How will the staff be integrated, and will there be a training program?
- What is the plan for the overall company culture going forward?
The merger process can be intensive, especially for a seller that has not done a deal in the past. There are many items that should be addressed through the diligence and closing stages of the process, including valuation, deal structure, future management team, and incentives. Typically, the company you are considering merging with will have done an acquisition in the past and you would want to ask for references from the senior leaders of the companies that were acquired in the past. Here are some of the questions you should ask.
- How has it been working with the leadership of the acquiring company?
- When you were going through the transaction, how was the closing process?
- After the deal closed, how much interaction did you have with the leadership of the acquiring company?
- What expectations did the acquiring company have of management post close?
- What resources are available from the company?
- Can you tell us about any difficult situations you have had with the acquiring company post-close and how you worked through it?
If you aren’t an expert in middle market M&A, and don’t aspire to be one, seeking help from an investment banker that specializes in middle market transactions will save you time, money, and help you identify whether entering a merger with a similar company is good fit for your objectives.
Recent Case Study
The principles at Founders Advisors recently served as exclusive advisor to Mustang Energy Services Inc. (“Mustang”) in its recapitalization and merger with Extreme Plastics Plus (“EPP), a portfolio company of Blue Wolf Capital Partners. Mustang provides lining and containment solutions to the oil and gas industry and was founded in 2011 by Todd & Whitney Creel, and Todd’s father, Rickey Creel. Founded in 2007, EPP is an environmental containment company that specializes in providing environmental lining, above ground storage tanks, composite mats, secondary containment systems, and drilling support services.
Mustang had begun to see tremendous growth due to positive trends in the water containment industry and the Creels approached Founders Advisors in search of advisory services that would help them realize part of their initial investment, while continuing to grow the Company with a new partner.
Founders Advisors performed a thorough assessment of the company, prepared marketing materials, and created a detailed financial model to convey the necessary information to the market. Additionally, Founders sourced buyers that would not only provide a solution but also would be a cultural fit. Founders made sure to perform detailed diligence of the groups to vet these solutions. In the end, Founders helped Mustang source and select the right partner to recapitalize the company and support the growth of the company going forward.
About Founders Advisors
Founders Advisors (Founders) is a merger, acquisition, & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, SaaS/software, industrials, internet, healthcare, digital media and industrial technology companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M & A Securities Group, Inc. or Founders M&A Advisory, LLC, both members of member FINRA & SiPC. M&A Securities Group and Founders are unaffiliated entities. Founders M&A Advisory is a wholly-owned subsidiary of Founders.