How Long Does M&A Preparedness Take?


Earlier this year, The National Center for the Middle Market at Ohio State published a report titled “Middle-Market M&A – What Executives and Advisors Need to Know in Order to Make the Most of Mergers and Acquisitions.” Participants in the study included 400 executives of middle market companies (with annual revenues from $10MM – $1Bn) that either completed an acquisition or a sale in the last three years, or were highly likely to sell or divest a division of their company in the next three years.

The key takeaway of this report was that mergers and acquisitions are critical to the growth of many middle market companies. Specifically, the report found that roughly 20% of middle market companies complete an acquisition annually, and 70% of companies that made an acquisition in the past three years had little or no previous experience.

On the sell side, about 5% of middle market companies sell to or merge into another business each year, and 90% of company owners that sold or merged in the past three years had little or no previous experience with M&A. Unfortunately, most executives do M&A infrequently and many are surprised by the challenges they face during the process.

With such little experience in M&A, sellers underestimate what it means to prepare their company for a transaction. The report concluded that most deals take less than a year to transact, but becoming “deal ready” might take several additional years beforehand.

Companies that are well prepared will be more successful. How long does it take? The report concluded that the ideal planning horizon to develop capabilities necessary to exit well for the seller takes three to five times the amount of time that it takes to execute the transaction. This means that strong preparation for the seller can take as little as 9 months or as much as five years! The median would indicate that it takes about 3 years for a company to be deal ready.

At Watermark, this report confirms our mantra to the industry. For quite some time now we have been emphasizing the importance of preparation for M&A success.

We have also been pointing clients to the fact that too many deals close with the aid of risky contingency payments. Earnouts and seller notes are two common examples of contingency payments. These contingency payments are received by the seller if, and only if, some financial benchmark is reached. Experience has proven that the seller’s likelihood of capturing the full transaction price is far less than 50%.

The reason buyers utilize contingency payments is that the buyer and the seller have very different views and expectations about how much of an “elite athlete” (metaphorically speaking) the acquired business actually is. Any company that prepares properly will more likely be seen as an “elite athlete” during the M&A negotiations, and that requires strong preparation.

Unfortunately, too many businesses are not in peak condition at the time of M&A valuations and negotiations. Further, it is a shame that there are hardly any firms that offer services specifically designed to prepare a company for an exit with optimal cash value. While exit planning services exist and have become popular, those services are geared more towards the business owner than the business itself. Our team at Watermark have become experts at overcoming this industry weakness.

P.S. If you are contemplating an M&A transaction in the near future, call us to request our “M&A Preparedness Report.”

1 Eighty-one percent of the time a sale transaction took between 3 and 12 months to execute and close.