Quicker Closes and Better Buys
Proactive lenders and stricter due diligence are the norm with today's M&A pros, argues Dresner Partners' Brian Graves
When it comes to closing transactions, dealmakers are implementing various tactics to ensure speed and efficiency, says Brian Graves, managing director at Dresner Partners, a Chicago investment bank.
Among the main trends Graves is noticing is how lenders are becoming more proactive. Sell-side bankers, for example, are presenting targets to lenders earlier in the sale process, as part of a prequalifying stage so that the deal can close in less time. Another trend is during the due diligence stage. These days, companies are likely to conduct a due diligence process even before they consider being put up for sale.
Having that done ahead of time and providing that information to potential buyers can shorten the sale process, Graves adds. A 20-year M&A veteran, Graves has advised various companies over the years on M&A matters, including St. Charles, Ill.-based Aquascape Inc. and St. Paul, Minn.-based Land O'Lakes Inc. Graves' experience also includes leadership and advisory roles with Ernst & Young, Credit Suisse Group AG (NYSE: CS), Mesirow Financial and Motorola Inc. Graves spoke with Mergers & Acquisitions about the current state of structuring deals, and what private equity firms can do to shape the buying and selling of portfolio companies.
What are dealmakers putting in place to ensure a faster close?
I sat down at a private equity roundtable recently with a bunch of financial sponsors, fellow investment bankers and deal attorneys, and the consensus was that if there is a deal that needs debt financing, bankers and lenders are becoming more proactive. Since interest rates have come down because of quantitative easing and because banks want to put money to work, you have mezzanine finance providers out there calling on private equity firms and saying: "If you have a deal, call me." On the sell side, investment bankers will reach out to potential lenders and say: "We're selling a company, would you be interested in providing financing for this?" Once the target has been prequalified and the number of interested buyers whittles down to a few, the lenders that have already looked at the deal may close in 30 days. The seller may prefer that option over lenders that will take 90 days. Time kills deals right? Private equity firms need to build their portfolios and they want to buy these companies as quickly as possible.
How have deal structures recently changed?
Sellers are starting to engage accounting firms, or outside third parties, to provide a quality of earnings analysis report before they go to market. Historically, a buyer looked at a company and conducted due diligence afterwards. Now, sellers are having that done ahead of time and providing that information to potential buyers to shorten the sale process. They can say: "This outside accounting firm has looked at our statements and here are the drivers of fixed costs, variable costs and revenue."
Could a change in deal structures increase the price tag of a company up for sale?
Companies that do a quality of earnings analysis beforehand may have higher valuations, but we haven't started to collect the data to prove that case. But like buying a used car, a certified pre-owned vehicle is likely to sell at a higher price because you get a much better sense of what you're buying. And when any accounting firm makes the due diligence process easier, that means the deal closes quicker and everybody's happy. I would argue today more than ever, buyers are conducting due diligence before they put their final offer on the table. They are getting more proficient and skilled during the due diligence process to figure out how they're going to run the business post-closing.
Are there fewer auctions taking place?