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"An M&A process is a relatively long and emotional process."
Preparing for an M&A transaction
The three components of the M&A process are:
While each element is very important to the transaction, the failure to properly prepare will result in the failure of any sales process.
Key to effective preparation
- Understand the historical financial performance of the business
- Understand and articulate how the financial performance of the business has evolved over time.
- Use that analysis to drive the forecast financial model for the future of the business, usually covering a three-year period.
You would look at the number of consultants and the performance of those consultants. You will also need to look at clients and understand both client performance and any client concentration, and for both clients and consultants, look at the churn. Reliance on key individuals can then drive an understanding of how they are tied to the future of the business, and if any legal due diligence is required.
Creating a detailed analysis
The first thing to understand is how the revenue line will evolve as you go forward and this is based on:
- the number of consultants in the business and their vintage
- historical gross margin performance and how that may evolve over time
- a sensible overhead cost base in order to drive the profitability of the business.
It needs to have the right level of detail combined with some flexibility to allow scenario analysis, but also be intuitive to the user and the recipient of the model.
Key legal information
You need to have a view of the key legal documents around the business, which includes:
- Supplier contracts
- Employment contracts
- Key customer agreements, as well as a view of any claims against the business over the historical period or any expected claims.
Identifying and resolving any issues ahead of moving into a process is very important.
Why M&A transactions fail
Reasons why M&A transactions fail
- Failure to prepare: A failure to understand the historical financial performance or to feed that into the forecast financial performance or a failure to identify issues in the legal review that cause complications further down the line.
- Failure to engage: A failure to engage properly with the buyer audience can result in disengagement and therefore a lack of appetite for the transaction.
- Trading performance of the business through the period: The business fails to hit its short-term financial goals, and causes disengagement of the buyer audience.
What to do next?
Find the right advisor who is experienced in the sector, but is also someone you trust. An M&A process is a relatively long and emotional process, and you really want someone beside you who you can rely on to support you through that period.
The powerful role of marketing in M&A
Marketing is crucial in identifying the right buyers, both trade and financial, especially in recruitment where you've got a big pool of international buyers either in the US, the Far East, or in Europe. Have some early engagement with those buyers so they're aware of the opportunity coming down the track, and they understand the business and how it might fit with their current operations.
The marketing process begins early
Engagement with the likely buyers of the business can begin very early before a process is even contemplated. A shareholder selling a business should be looking to build relationships with the likely buyers at a very early stage.
What does that marketing look like?
During a sales process, you are normally given a short teaser document that provides an overview of the opportunity, supported by an information memorandum. This is a detailed document outlining the history of the business and future plans. This is followed by a management presentation in which a short list of buyers would be offered the opportunity to meet with the management team, and hear their story first hand, as it were.
The key thing through all of the marketing material is to have consistency in the presentation of the key selling messages and a crisp articulation as to why the business is unique in nature and is an attractive opportunity for potential buyers.
The marketing must be fit for due diligence
The key selling messages must reflect the underlying business and be supported by the KPIs of the business.
Completing an M&A transaction
As you move into financial negotiations with multiple buyers, you're aiming to clear all the financial commercial issues ahead of awarding a short period of exclusivity to a single buyer. That timeframe is used to finalise any legal agreements and move to completion.
The final stages
Once you receive offers from a number of interested parties, you will invest some time into understanding any questions you or the shareholders may have, as well as the deliverability of those offers. You need to understand that the buyer has done the required work to be able to sign the legal agreements and complete a transaction.
Additional resources on M&A in recruitment
Hear KPMG senior directors, Neil McManus and Shashi Prashad, share their business advice on the common pitfalls to look out for in Mergers and Acquisitions in recruitment.
You'll hear about:
- Big trends in the M&A market following COVID-19
- What buyers are looking for when they assess recruitment businesses
- What businesses should be doing to boost shareholder value
- Key considerations for business leaders preparing for exit in 6/12/18 months
- Essential tax advice for businesses going global or taking the road to exit
- Advice for businesses thinking about their long-term finance and ownership structure
In this guide, you'll learn from subject matter experts, gain access to trusted suppliers, and build your understanding of what it takes to sell your business.
- Initial thinking
- How to close your business
- Using a broker to sell your business
- Guide to management buyout
- Selling shares to your partner or an investor
- Mergers and acquisitions
- HR/personnel
Our guide for exit is available to REC members and non-members:
Access for REC members
Guide for exit- for REC members
Not an REC member?
Answer a few questions to access the guide to selling your business.
This guide highlights the areas that companies should consider over a three-year horizon to help ensure value is increased, risks are mitigated and business performance is optimised. It has been written by experts across KPMG who have worked extensively advising private and private equity-backed companies on their ‘road to exit’. In this second edition, we have updated the content and expanded it to cover new themes and areas of focus for investors and acquirers as well as covering postdeal matters.
This comprehensive guide offers holistic advice on how to explore, evaluate and target those markets that could work for your business according to the maturity of your overseas strategy. From small businesses with little or no footprint overseas to larger organisations who are already operating abroad successfully, we hope this guide will help you to assess the cost versus the benefits, and the risks versus the return for any business that recognises the huge opportunities on offer through ‘going global’.
How KPMG can help
KPMG's recruitment sector team has market-leading expertise, with a reputation for delivering excellence for their clients. Their teams are able to support organisations to transform their business operations and help them be more agile in such a fast pace industry. As business partners of the REC, KPMG can offer insight and support around key business issues including M&A considerations and how to grow your business via expansion into overseas markets.
Get in touch:
Oliver Gale
Head of Business Development - South-East
KPMG UK
oliver.gale@kpmg.co.uk
07825902874
