Merger and acquisition activity growing strong
“There are some ideal opportunities for acquirers, because they can get into good, strong, profitable companies with great management teams.” AJ Felix President and CEO Jasper Enterprises
AJ Felix has been involved in a number of mergers and acquisitions in his business career. Now President and CEO of Jasper Enterprises Inc., a professional services consultancy, he continues to spend time examining acquisition opportunities in the Saskatoon region.
He says prospects are growing, mainly because of retiring baby boomers looking for an exit strategy. “There are some ideal opportunities for acquirers, because they can get into good, strong, profitable companies with great management teams.”
When checking out a potential acquisition, he says, “By far, the main thing we look for is a top management team. Getting the right people is very important, especially when you don’t have the management capacity yourself.”
The market in Saskatoon has been especially strong in the past two years, he adds, and while that’s great for business, it also means asking prices are relatively high. “Owners are basing their valuations on last year’s performance. But that doesn’t mean those numbers are sustainable.”
Merger and acquisition activity in the region will continue to grow in the foreseeable future, says Kevin Anderson, District Manager for Roynat Capital in Saskatoon. “It’s simply following a demographic trend where owners are approaching retirement. We’re seeing significant demand for transition financing in the local market.”
While activity has been growing steadily in Saskatoon, there is less interest from south of the border than in previous years, says Craig Hermann, Tax Partner with Ernst & Young LLP’s Saskatoon office. “Since the 2008 downturn in the U.S., that capital has dried up. But we are seeing a lot of worldwide interest and buying and selling in the oil and gas and mining sectors.”
Anyone considering selling their business should start planning three to five years in advance, Anderson says. “That’s the time to start thinking about your existing management team’s role in the transition. You want to do everything possible to improve efficiency and drive solid financial results - it should be a period of intense focus, not early retirement” ‘If you are looking at an acquisition,” he adds, “it’s also a good idea to start preparing as far ahead as possible. Whether it means assessing leadership, recapitalizing your balance sheet, or exploring your financing options, it is helpful to get an early jump on the situation.”
“One senior partner used to say it was a lot easier to buy a business than to sell it,” Hermann says. “The biggest advice I would give to someone finding themselves on a path to selling their business is to plan in advance from both an economic and operational point of view. All too often we see clients that don’t give themselves enough time to get their affairs in order.”
A lot of what needs to be done is tax-driven, he says. “You have to make the company as attractive as possible, which may mean moving out some assets, and taking advantage of capital gains exemptions. Alot of times those opportunities are reduced once you’re involved in the sale of the business.”
Involving the management team as you go through process is critical because it helps them to prepare for the transition and to secure their buy-in early in the process. A proper valuation of the business by a third party can also play a key part in keeping the emotions out of negotiations.
In addition, Hermann advises drawing “a line in the sand” so you know when to put on the brakes if things start going in the wrong direction. “Clients get into sell mode convinced the business has to go. Purchasers can sense that and will continue to ask for more and more. If you get too far down the road, you can’t pull back. You need to know when enough is enough.”
For an acquirer, Hermann says the biggest challenge is understanding the cultural environment and ensuring a smooth integration. “You have to make sure there’s a fit. The most successful acquisitions are where the new owner has a good integration plan.”
Given the labour shortages in the region, he says the demographics of the business you are buying also come into play. “If everyone is in their late 40s or 50s, I’d be more nervous than if the labour pool was in their 20s and 30s.”
Once the merger or acquisition deal is signed, the first couple of years post-transaction are critical, Anderson adds. “There are always surprises within those first two years. It could be skeletons in the closet or underestimating the process of integration of management and ownership teams. I always caution clients to arrange the most suitable capital structure up front so you can withstand the challenges that may come your way after the fact.”