Issues During the Due Diligence Process in M&A Transactions

Issues During the Due Diligence Process in M&A Transactions

 

LUTZ BUSINESS INSIGHTS

 

issues during the due diligence process in m&a transactions

bill kenedy, LUTZ consulting and m&A shareholder

 

Completing a due diligence analysis is a critical step in the M&A process. Due diligence is conducted to validate value proposition assumptions, evaluate strategic and financial risks, and support deal decision making. Many times, there are issues that arise in these findings that may negatively impact a deal going through.

Here are a few common issues found during the due diligence process:

  • High customer concentration
  • Overstated EBITDA add-backs
  • Working capital peg
  • Unsustainable growth projections
  • Low EBITDA margins
  • Unusual revenue swings
  • Inaccurate financial statements
  • Top management lack of control

“I’ve seen many of these issues arise during the due diligence phase of different M&A transactions. The most common issue revolves around working capital.  Typically the definition and calculation of the ‘working capital peg or target’ is addressed late in the sale process during purchase agreement negotiations.  Many times this leads to disagreements which is why we strive to address working capital expectations with buyers as early in the process as possible,” said Lutz Consulting and M&A Shareholder, Bill Kenedy.

Although these are common issues, not all transactions are subject to negative findings. Here are a few things to keep in mind to help you prepare your business for a clear due diligence analysis:

1. Know that a buyer will want to make themselves comfortable that your company is sustainable. Meaning your business doesn’t have any significant risk to future sales, profitability and growth.

2. A buyer will want to confirm that your company’s financial performance is as good as you have portrayed it to be. With this in mind, know that they will check every aspect of your performance, including confirming revenues, costs and EBITDA adjustments.

3. Companies with audited or reviewed financials tend to have a better due diligence experience than those without CPA prepared quality financials.

4. If you have a large customer that will be hard to replace, this will typically reduce the amount buyers are willing to pay.

5. If there are gaps in your management team, your company’s EBITDA will be negatively adjusted for the cost of hiring and compensation of new executives.

Issues uncovered during due diligence may result in change of deal terms and could prevent a deal from closing. So, it’s important to consider these factors when deciding to sell your business. The goal when selling your company is to receive more than what you paid for it. So, you don’t want to receive anything less than what it’s worth just because of a few insufficiencies.

With proper preparation, negative surprises during the due diligence process can be eliminated. If you have questions concerning the due diligence process of an M&A transaction, please contact Lutz M&A.

 

Merger & Acquisition Basics Toolkit

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

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P: 402.496.8800

HASTINGS

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P: 402.462.4154

LINCOLN 

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Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

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Grand Island, NE 68803

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Exit Planning Strategies for Business Owners

Exit Planning Strategies for Business Owners

 

LUTZ BUSINESS INSIGHTS

 

exit planning strategies for business owners

Business owners are good at dealing with everyday decisions, but they often forget that a main reason they are in business is to be rewarded for building a valuable business. The issue many are facing these days is that research indicates less than 10% of business owners have a formal exit strategy in place. Led by Bill Kenedy of Lutz M&A, this presentation will cover the questions business owners should be asking themselves and steps to help make the decision process easier.

 

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

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Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

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Grand Island, NE 68803

P: 308.382.7850

Lutz M&A Advises Fantasy’s, Inc. on its Acquisition by Casey’s General Stores

Lutz M&A Advises Fantasy’s, Inc. on its Acquisition by Casey’s General Stores

 

LUTZ BUSINESS INSIGHTS

 

lutz m&a advises fantasy’s,  inc. on its acquisition by casey’s general stores

bill kenedy, LUTZ consulting and m&a shareholder

 

Lutz M&A announced that it served as exclusive financial advisor to Fantasy’s, Inc. in connection with its recent acquisition by Casey’s General Stores, Inc. (“Casey’s).  Casey’s is a Fortune 500 company (NASDAQ CASY) operating over 2,100 convenience stores in 16 states in the Midwest and the South. Casey’s is currently the fourth largest convenience store chain and the fifth largest pizza chain in the United States.

Founded in 1989, Fantasy’s is Omaha’s premium chain of gas stations, convenient stores and touchless car washes.  Casey’s plans to leave the popular touchless tunnel car washes in place and continue to use the Ride the Wave brand, while bringing its famous pizzas to the nine Omaha metro area locations.

“The acquisition of the Fantasy’s chain is an excellent fit to our existing store base and will expand our presence in the greater Omaha market,” said Terry Handley, President and CEO of Casey’s General Stores, Inc.  “They are a very well established and managed chain, and we are excited to welcome the Fantasy’s employees to the Casey’s family.”

On working with Lutz M&A, Fantasy’s owner Karen Spaustat observed, “Lutz did a great job guiding us through the process of marketing our company and introducing us to several interested parties. They ultimately helped us find the right fit with Casey’s General Stores.”

Commenting on the transaction for Lutz M&A, Bill Kenedy said, “It was a great opportunity to represent this long-term client of Lutz in this transaction.  We are happy for the Spaustat family and believe Casey’s acquired a great company in Fantasy’s.

 

Fantasy's Logo Casey's logo

 

About Lutz M&A, LLC: Lutz M&A is a Nebraska-based mergers and acquisitions advisory firm, serving lower middle-market businesses in the Midwest across a range of industries. Lutz M&A is committed to providing its clients with a comprehensive, skilled and professional marketing process not typically available to smaller market companies. For more information, visit www.lutz.us.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

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We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

The M&A Process + Timeline & Milestones

The M&A Process + Timeline & Milestones

 

LUTZ BUSINESS INSIGHTS

 

The M&a PROCESS + TIMELINE & MILESTONES

BOB LOEWENS, LUTZ M&A MANAGER

 

Selling your business can be time-consuming and unpredictable. Knowing what to expect will prepare you for what’s ahead and can help get your deal to closing.

The M&A process can be broken down into four unique phases:  pre-marketing, marketing, letter of intent (LOI) signing, and final due diligence. The graph below illustrates this general M&A timeline.

 

 M&A Timeline

Note:  Timeline may vary based on various factors including availability of information, seller responsiveness, and overall buyer response to the deal. Lutz M&A will lead/be involved throughout the process.

Pre-Marketing Phase

Lutz M&A will begin the sale process by assessing your company, as well as current market dynamics. We do this to help determine the best strategy for bringing your company to market. Our goal is to bring multiple buyers to the table and work with our clients to select an optimal transaction structure to meet their needs.

After we finalize a targeted buyer list, we create marketing materials with detailed information on the subject company. These materials include a teaser, which is an anonymous one-page summary, in addition to a confidential information memorandum (CIM) that describes the business in much greater detail.  The CIM will reveal specifics about the business and provides key information that a buyer needs to fully assess the opportunity.  We understand that every Company has a unique story to tell and we want to convey that as effectively as possible. The process of preparing marketing materials helps us learn about the Company, and it prepares us to field questions and run the deal process, with minimal involvement from our client.

 

Marketing Phase

In the marketing phase, we begin to initiate contact with potential buyers. This is done via direct outreach to specific buyers and is kept strictly confidential. We do not post active engagements on the Lutz website, but rather we proactively engage with potential suitors.  If a buyer wishes to view the CIM, we require them to sign a non-disclosure agreement (NDA).  Upon signing the NDA, buyers are also informed of deal milestone dates in order to target a timely close. If interested in pursuing the deal further, buyers will submit an indication of interest (IOI), essentially a preliminary non-binding offer.  We will work with our clients to evaluate each IOI and create a list of the top candidates, which will then be invited to move on to the next phase in the process.

 

Letter of Intent (LOI) Phase

Buyers invited to move on to the LOI phase will be given more access to information. This may include more detailed financial items not previously provided and further calls/discussions with Lutz M&A. Additionally, buyers are invited to meet our client’s management team in person. This meeting typically lasts several hours and allows the parties to get better acquainted and to further assess a potential partnership.

LOI’s are generally due shortly after these management meetings. While the LOI is not a legally binding document, it does lay out key deal parameters to come later in the purchase agreement. Lutz will work closely with our client to assess and negotiate LOI’s.  At this point, one party is typically selected for exclusive negotiation with our client and due diligence begins.

Due Diligence Phase

In this final stage, our team manages and facilitates communication between the buyer, seller, attorneys, and other third party due diligence groups.  As attorneys work through various drafts of the purchase agreement, we will help assess and negotiate deal terms, while acting as the quarterback to keep the deal moving towards closing.  Buyer and seller (and attorneys) will eventually agree on all terms and the definitive purchase agreement is signed and the deal closes.  This due diligence phase often takes 90 days or longer.

 

In summary, the M&A process can be lengthy and complex.  Lutz M&A can help you navigate your deal to a successful closing.  Our experienced professionals will utilize their experience to help keep your deal on track and running smoothly.

ABOUT THE AUTHOR

402.778.7955

bloewens@lutz.us

LINKEDIN

BOB LOEWENS + LUTZ M&A MANAGER

Bob Loewens is a Lutz M&A Manager with over nine years of experience. He specializes in business valuations, financial consulting, and M&A advisory services.

AREAS OF FOCUS
  • Mergers & Acquisitions
  • Business Valuation
  • Financial Consulting
AFFILIATIONS AND CREDENTIALS
  • CFA Society Nebraska, Member
  • Chartered Financial Analyst
  • Certified Valuation Analyst
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Omaha, NE

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Primary Benefits of Selling Your Company to an ESOP

Primary Benefits of Selling Your Company to an ESOP

 

LUTZ BUSINESS INSIGHTS

 

PRIMARY BENEFITS OF SELLING YOUR COMPANY TO AN ESOP

BILL KENEDY, LUTZ CONSULTING AND M&A SHAREHOLDER

 

Business owners sometimes overlook the option of selling their company to an Employee Stock Ownership Plan (ESOP). Although this option may not be right for all businesses, it can be a very attractive and flexible alternative for the right type and size of business. The following is a list of some of the potential benefits of an ESOP:

 

1. The selling owner can still be employed by the business and potentially still control the business.

2. There is no disruption to the business (which typically occurs with a 3rd party sale).

3. The business name and employees remain intact.

4. The transaction can be structured in phases (owner does not have to sell entire business at one time).

5. An ESOP can used borrowed funds to pay the owner for the sale (need to address bank guarantees).

6. ESOPs act as a motivator and incentive-based retirement plan for employees.

 

Tax Benefits! 

  • Sales to ESOPs are typically stock sales, giving the owner capital gain treatment for the transaction.
  • An S-Corporation that is owned (100%) by an ESOP pays no income taxes! Among other things, that makes the repayment of debt associated with the transaction much easier.
  • A C-Corp can effectively deduct the loan payments made on the ESOP bank note.
  • C-Corp owners can defer paying tax on the sale (under specific circumstances).

 

These are some of the more important benefits of an ESOP, but this is not a complete list. Please contact us if you would like to discuss ESOPs in greater detail.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Is Your Business Transferable?

Is Your Business Transferable?

 

LUTZ BUSINESS INSIGHTS

 

Is Your Business Transferable?

RYAN MCGREGOR, LUTZ M&A MANAGER

 

Does your business rely on you to generate revenue? Does most of your revenue come from a few customers? Does your company lack depth of management? Do you have short term or no contracts with customers or suppliers? Do you have outdated technology for your industry? Are there limited barriers to entry?

If you have answered yes to most of these, then transferring your business may be difficult. When it comes to selling you really should ask yourself, why would someone buy my company? What are they really purchasing?

“Intellectual capital is knowledge that transforms raw materials and makes them more valuable.”  – Thomas A. Stewart, The Wealth of Knowledge

Christopher M. Snider, author of “Walking to Destiny: 11 Actions an Owner MUST Take to Rapidly Grow Value & Unlock Wealth”, breaks intellectual capital or knowledge assets into four groups. He titled these groups Human Capital, Customer Capital, Structural Capital and Social Capital.

1) HUMAN CAPITAL measures the depth and talent of your team. If a buyer feels your team has the know-how and know-what, they will pay more.

2) CUSTOMER CAPITAL considers how entrenched are you in your customer’s business. Do they rely on you to be successful?

3) STRUCTURAL CAPITAL is focused on the infrastructure of a business. These are the systems and tools that allow the human capital to interact with the customer capital.

4) SOCIAL CAPITAL could be best described as your company’s culture or brand. This is the secret sauce! You could have the best product in the world with a great distribution system, but if you don’t have the workforce that cares about the perfection of the product, the customer service when things go wrong, or the empathy to care about their fellow employees, the business will eventually be impacted.

An important thing to consider when implementing a strategy for making your business more transferable is acknowledging this actually helps you right now. For instance, most business owners miss the concept that delegating more work to employees will free up time for you to spend on more impactful business decisions, or even allow you to take some time to enjoy activities outside of the business.

The key concept to the transferability of a business is what can be transferred, and is it valuable enough for someone to pay for it. Furthermore, if you find that you are integral in most of the value in the company, then it may not be transferable. Before you determine when you are going to transition your business, you should review these concepts. 

ABOUT THE AUTHOR

Ryan McGregor

402.778.7946

rmcgregor@lutz.us

LINKEDIN

RYAN MCGREGOR + LUTZ M&A MANAGER

Ryan McGregor is a Lutz M&A Manager with a combined 14 years of related experience. He specializes in business consulting, valuation, and sell-side advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • Alliance of Merger & Acquisition Advisors, Member
  • National Association of Certified Valuators and Analysts, Member
  • Certified Merger & Acquisition Advisor
  • Certified Valuation Analyst
EDUCATIONAL BACKGROUND
  • BSBA in Management, University of Nebraska, Kearney, NE
  • Master of Investment Management and Financial Analysis, Creighton University, Omaha, NE
  • Master’s in Business Administration, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • Past volunteer for various local nonprofit organizations including: Juvenile Diabetes Research Foundation (JDRF), Habitat for Humanity, Red Cross and Open Door Mission

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850