As a seller, you go into an M&A with the objective of getting the optimal result for your company, such as a high sales price, advantageous agreement terms, and a smooth closing and transition. Working with an experienced M&A advisor and adhering to a disciplined M&A process are essential in reaching those goals. But sometimes, after starting the process, it becomes clear that the time isn't right for a sale. Perhaps an economic downturn has deterred potential buyers or it's evident from initial contacts that your company's financials and future growth projections are not good enough for attractive offers. At times like these, it's a good idea to consider a hiatus ‒ a pause in the M&A process with the intention of returning to it at a later time when conditions are more favorable to get the results you want. Taking a hiatus is formally supported at Corum, something that is rare among investment bankers.
Steve Jones, an industry advisor at Corum, points out that going through a formal M&A process provides sellers with the critical information they need to decide whether to continue pursuing a sale or take a break. Jones sees the process as a journey of discovery. He says, "In going through the M&A process, a prospective seller discovers a lot of things such as what international markets are available, what complementary technologies exist, how those technologies either encroach on the seller's space or complement that space. "Jones says he looks at the process as a strategic dialog with the market as well as the seller's company and shareholders. That dialog provides sellers with the confidence to say that an incoming offer is a good opportunity, or the knowledge to take a breath and recalibrate based on the things they've learned.
Sitting on a gold mine
Sometimes the reason for going on hiatus is future potential. Jones recalls a client who had originally gone to market with the intention of selling his company. However, the offers he got were low. But during this period the client was about to launch a new product. Prospective buyers were excited by the new product, but didn't yet see enough of a market validation for it to raise their valuation of the company. The client recognized that if he waited, did additional R&D on the product, and eventually launch, there was the potential for a big boost in the company's valuation. Jones remembers the client saying, "Maybe I'm not ready to sell if there's a gold mine I'm sitting on. So I think I'm going to take a break here." And that is what the client did. He decided to go on hiatus ‒ actually, the client is still on hiatus ‒ and focus on the new product. That break resulted in offers from two companies to partner with the client's company. Jones says that within six months of establishing those partnerships, the client's company grew their revenue by 50%.
A time to streamline
Taking a hiatus is also a good opportunity to address issues that stand in the way of a good offer. Jones recalls a situation where he contacted 80 potential buyers for a client, but only one showed any interest. But even that prospective buyer was put off by the selling company's heavy emphasis on services. The buyer wanted to see more of a subscription-based model. Jones and the client realized they had to make some specific changes to interest buyers. He recalls, "We kind of sat around the campfire and said if this is what the market is telling us, you (the seller) have got to adjust the way you go to business or go to market. You've got to streamline your services offerings and put more weight behind subscription to get credit for technology." The client then went on hiatus to devote the time needed for those changes. It took the client's company 18 months to demonstrate that the changes were implemented. But that time and effort were well worth it. Jones notes that after returning to market, the client received interest from four companies and got two formal offers. Remember the one buyer who was initially interested? That buyer made one of those two formal offers and increased their bid by five times.
At Corum, a client that takes a hiatus from the M&A process continues to have full recognition. Jones says this means that when a client is on hiatus Corum still has them top of mind in responses to inquiries from potential buyers. He says, "We get inquiries all the time that ask, 'Hey do you have a company that looks like this?' For a client on hiatus, we can respond, 'Yes we do. They're not in the market right now, but we can call them.'"
The primary change during a hiatus is that billing and the monthly retainer stop. When the client ends the hiatus and returns to the M&A process, billing is resumed and the monthly retainer goes back into effect. Everything else returns to the point before the client went on hiatus. Corum refreshes the client's documents, their financial records, and their buyers list. By not having to restart from scratch, the post-hiatus reentry into the M&A process represents a significant savings of cost and effort for clients.
Additionally, clients have the peace of mind knowing that if they receive an offer that they're not comfortable with during the M&A process, there are no fees owed to Corum.
They can go on hiatus or continue their search. By comparison, some investment banks require some level of fee, bonus, or payment if they bring an offer to the table ‒ no matter what that offer looks like. The only offer that requires payment to Corum is the one the client accepts.
Are there risks?
Going on hiatus can entail some risks. Jones points out that the main risk is missing the window. He notes, "The market changes direction. People find somebody else. In some cases, you become outdated technologically. These can mean you don't have a dance partner at the end of the day."
Another risk Jones points to is what the seller achieves during the break. He puts it this way, "How do you execute to an exponential outcome in a short period of time? Are you giving yourself enough of a time period to show a significant difference? If you take a hiatus for 18 months, what if your growth is not impressive enough to catch the buyer's eye? Now you've painted yourself as someone who can't build momentum and you lose the value of your company that way."
But despite the risks, Jones stresses that the option of going on hiatus is of great benefit to a seller. According to Jones, "What you discover during the M&A process ‒ the contacts, the feedback, the understanding of what potential buyers value ‒ will give you the insight to make an informed decision about whether to proceed or take a break at the right time. And that break can lead to greater opportunities."