{"id":54342,"date":"2023-03-23T13:08:03","date_gmt":"2023-03-23T20:08:03","guid":{"rendered":"http:\/\/www.enxmag.com\/twii\/?p=54342"},"modified":"2023-03-23T13:08:05","modified_gmt":"2023-03-23T20:08:05","slug":"the-ma-process-due-diligence-the-best-way-to-ferret-out-red-flags","status":"publish","type":"post","link":"https:\/\/www.enxmag.com\/twii\/the-week-in-imaging-twii\/editors-blog\/2023\/03\/the-ma-process-due-diligence-the-best-way-to-ferret-out-red-flags\/","title":{"rendered":"The M&A Process: Due Diligence the Best Way to Ferret Out Red Flags"},"content":{"rendered":"\n
\"\"<\/figure><\/div>\n\n\n\n

It\u2019s amazing to see the high degree of clickbait articles that are still floating around the internet. I\u2019m sure most of us have succumbed to them, at one point or another, out of boredom or curiosity. But we can all see the telltale signs that indicate the poster is just fishing for clicks.<\/p>\n\n\n\n

Imagine the above headline reads: \u201c20 Outrageous Reasons Office Tech M&A Deals Fall Apart\u2014You Won\u2019t Believe No. 17.\u201d Admittedly, it would be fun to learn that one seller was actually a front for a cult that is planning a trip to the moon to unite with Devana, the Slavic goddess. Fact of the matter is, the red flags most buyers encounter are fairly universal and are unearthed through routine due diligence procedures.<\/p>\n\n\n\n

Regardless, we don\u2019t need to manufacture headlines that draw attention to M&A these days. Last week, our roundup featured an unprecedented six deals in one week, and we narrowly missed a seventh when Flex Technology Group announced a major deal just after the newsletter had been mailed (read about it here<\/a>). So, we\u2019ll spare you from tales that are salacious, outrageous and bizarre, because reality has been far more interesting of late. This leads us to this week\u2019s M&A subtopic of red flags that can put the kibosh on negotiations\u2026and you will believe them.<\/p>\n\n\n\n

\"\"
A.J. Baggott, RJ Young<\/figcaption><\/figure><\/div>\n\n\n\n

One of the more common and earlier-detectable signs that a deal may not be imminent is when seller owners or their brokers are liberal with the adjustments made to their EBITDA calculations, which RJ Young President AJ Baggott believes is an early indicator for the Nashville, Tennessee, dealer heading into the financial due diligence and review. At a more micro level during the due diligence process, an organization\u2019s ability to provide clear and well-documented support for the requested documentation says a lot about the organization and the likelihood of the provided detail\u2019s accuracy.<\/p>\n\n\n\n

\u201cMissing support or unclear backup is a red flag that the financials may or may not be accurately represented,\u201d Baggott said. \u201cFurther, when variances do occur over time periods under review and no clear explanation can be provided for the change in financial trend, that tends to be a red flag that either something could be off or there is no clear line of sight in the operational performance to financial outcome.\u201d<\/p>\n\n\n\n

Contracted Woes<\/strong><\/p>\n\n\n\n

\"\"
Aric Manion, Kelley Connect<\/figcaption><\/figure><\/div>\n\n\n\n

It\u2019s important to take a deep dive into the recurring revenue that a seller is gleaning from its contractual agreements, notes Aric Manion, CEO of Kelley Connect in Kent, Washington. Careful analysis might yield a significant issue, such as the lack of minimum bases within contracts.<\/p>\n\n\n\n

\u201cThere have been a lot of sellers that didn\u2019t have bases in their contracts when we looked at their invoicing system,\u201d he said. \u201cYou really need to review the contracts, because you\u2019re really buying the recurring revenue. The same goes for ensuring they don\u2019t have a concentration of customers that may be at risk of going away.\u201d<\/p>\n\n\n\n

\"\"
Jim Sheffield, UBEO <\/figcaption><\/figure><\/div>\n\n\n\n

That lack of contracted bases in service pacts and inconsistent profit margins equate \u201cnoise in the financial statement,\u201d notes Jim Sheffield, CEO of UBEO Business Services in Austin, Texas. Recurring revenue, as Manion alluded to (and Sheffield concurs) is everything.<\/p>\n\n\n\n

\u201cIt\u2019s the recurring revenue aspect that makes our business so great,\u201d he said. \u201cNot that we can\u2019t fix that (lack of bases), but it\u2019s definitely an issue. We can work through a lot of problems as long as their people run a tight, solid financial department. That\u2019s beneficial for the seller to have.\u201d<\/p>\n\n\n\n

Band-Aids<\/strong><\/p>\n\n\n\n

\"\"
Dan Ruhl, Oval Partners<\/figcaption><\/figure><\/div>\n\n\n\n

During the pandemic, many U.S. businesses took advantage of paycheck protection program funds that enabled them to meet payroll obligations and keep workers gainfully employed. The drawback, notes Dan Ruhl, a partner with Oval Partners\u2014the private equity firm behind Flex Technology Group\u2014is that some businesses maintained a headcount that couldn\u2019t be justified by their revenue and profits.<\/p>\n\n\n\n

\u201cThe businesses that didn\u2019t make the decision to right-size during the pandemic period and are still at a lower revenue with a higher cost base make it harder for us to look at them [for a possible acquisition] today,\u201d Ruhl said.<\/p>\n\n\n\n

\"\"
Joe Dellaposta, Doing Better Business<\/figcaption><\/figure><\/div>\n\n\n\n

Most dealers agree that a lack of transparency can indicate underlying or unspoken problems. Joe Dellaposta, COO of Doing Better Business in Altoona, Pennsylvania, believes that when a seller is not completely open with him from the start, issues will gradually be unearthed, making the entire process a waste of time.<\/p>\n\n\n\n

A deeper look into a company\u2019s payroll can also yield inconvenient truths, such as huge turnover in key positions, which could speak to the corporate culture. \u201cIf a company has five salespeople, and all five have been there for less than six months, that\u2019s probably a huge red flag,\u201d Dellaposta said.<\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s amazing to see the high degree of clickbait articles that are still floating around the internet. I\u2019m sure most of us have succumbed to them, at one point or another, out of boredom or curiosity. But we can all see the telltale signs that indicate the poster is just fishing for clicks. Imagine the above headline reads: \u201c20 Outrageous Reasons Office Tech M&A Deals Fall Apart\u2014You Won\u2019t Believe No. 17.\u201d Admittedly, it would be fun to learn that one seller was actually a front for a cult that is planning a trip to the moon to unite with Devana, the Slavic goddess. Fact of the matter is, the red flags most buyers encounter are fairly universal and are unearthed through routine due diligence procedures. Regardless, we don\u2019t need to manufacture headlines that draw attention to M&A these days. Last week, our roundup featured an unprecedented six deals in one week, and we narrowly missed a seventh when Flex Technology Group announced a major deal just after the newsletter had been mailed (read about it here). So, we\u2019ll spare you from tales that are salacious, outrageous and bizarre, because reality has been far more interesting of late. This leads us to this week\u2019s M&A subtopic of red flags that can put the kibosh on negotiations\u2026and you will believe them. One of the more common and earlier-detectable signs that a deal may not be imminent is when seller owners or their brokers are liberal with the adjustments made to their EBITDA calculations, which RJ Young President AJ Baggott believes is an early indicator for the Nashville, Tennessee, dealer heading into the financial due diligence and review. At a more micro level during the due diligence process, an organization\u2019s ability to provide clear and well-documented support for the requested documentation says a lot about the organization and the likelihood of the provided detail\u2019s accuracy. \u201cMissing support or unclear backup is a red flag that the financials may or may not be accurately represented,\u201d Baggott said. \u201cFurther, when variances do occur over time periods under review and no clear explanation can be provided for the change in financial trend, that tends to be a red flag that either something could be off or there is no clear line of sight in the operational performance to financial outcome.\u201d Contracted Woes It\u2019s important to take a deep dive into the recurring revenue that a seller is gleaning from its contractual agreements, notes Aric Manion, CEO of Kelley Connect in Kent, Washington. Careful analysis might yield a significant issue, such as the lack of minimum bases within contracts. \u201cThere have been a lot of sellers that didn\u2019t have bases in their contracts when we looked at their invoicing system,\u201d he said. \u201cYou really need to review the contracts, because you\u2019re really buying the recurring revenue. The same goes for ensuring they don\u2019t have a concentration of customers that may be at risk of going away.\u201d That lack of contracted bases in service pacts and inconsistent profit margins equate \u201cnoise in the financial statement,\u201d notes Jim Sheffield, CEO of UBEO Business Services in Austin, Texas. Recurring revenue, as Manion alluded to (and Sheffield concurs) is everything. \u201cIt\u2019s the recurring revenue aspect that makes our business so great,\u201d he said. \u201cNot that we can\u2019t fix that (lack of bases), but it\u2019s definitely an issue. We can work through a lot of problems as long as their people run a tight, solid financial department. That\u2019s beneficial for the seller to have.\u201d Band-Aids During the pandemic, many U.S. businesses took advantage of paycheck protection program funds that enabled them to meet payroll obligations and keep workers gainfully employed. The drawback, notes Dan Ruhl, a partner with Oval Partners\u2014the private equity firm behind Flex Technology Group\u2014is that some businesses maintained a headcount that couldn\u2019t be justified by their revenue and profits. \u201cThe businesses that didn\u2019t make the decision to right-size during the pandemic period and are still at a lower revenue with a higher cost base make it harder for us to look at them [for a possible acquisition] today,\u201d Ruhl said. Most dealers agree that a lack of transparency can indicate underlying or unspoken problems. Joe Dellaposta, COO of Doing Better Business in Altoona, Pennsylvania, believes that when a seller is not completely open with him from the start, issues will gradually be unearthed, making the entire process a waste of time. A deeper look into a company\u2019s payroll can also yield inconvenient truths, such as huge turnover in key positions, which could speak to the corporate culture. \u201cIf a company has five salespeople, and all five have been there for less than six months, that\u2019s probably a huge red flag,\u201d Dellaposta said.<\/p>\n","protected":false},"author":166,"featured_media":54343,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[80,1650,82,3187,1638],"tags":[501],"_links":{"self":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts\/54342"}],"collection":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/users\/166"}],"replies":[{"embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/comments?post=54342"}],"version-history":[{"count":2,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts\/54342\/revisions"}],"predecessor-version":[{"id":54345,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts\/54342\/revisions\/54345"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/media\/54343"}],"wp:attachment":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/media?parent=54342"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/categories?post=54342"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/tags?post=54342"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}