M&A lulls present an opportunity for increasing enterprise value

This article written by attorney Emily Penaskovic, was originally published by both the NHBR and seacoastoline.com and can be found here.

In October, Sheehan Phinney lawyers based in Portsmouth joined together with Peloton Advisory, an M&A advisory firm, to lead an interactive panel regarding trends in the current M&A market and what privately held companies can do to increase the enterprise value of their business when preparing for a future sale. A few key takeaways from that discussion are that the M&A market is still active, albeit lethargic when compared with recent years, and for companies facing a longer runway before launching into a transaction, this can present an opportunity to do some legal housekeeping, which can help increase enterprise value when an exit opportunity arises.

M&A trends

For those who have not yet been through a business transaction, the term “M&A,” often tossed around by business advisors, may be perplexing. Mergers and acquisitions, usually abbreviated as “M&A,” relates to the buying and selling of businesses. These types of deals are commonly structured as either an asset deal, where the company sells all or substantially all of its assets, or a stock sale, in which case the company’s owners sell their ownership interests.

Despite the economic shifts that have taken place over the past year, including rising inflation, fears of a recession and increased interest rates, M&A deal activity has not come to a halt, particularly for mid-market deals. Smaller transactions have been less affected by market volatility than larger mega-deals, which are rare in New Hampshire. That said, there have been shifts in certain aspects of the deals as compared with the height of transaction activity in 2021.

When it comes to the buyers in these transactions, there has been less activity from private equity buyers as opposed to strategic buyers. Private equity deals involve funds that raise money from investors, acquire and grow businesses, then sell the businesses as an investment strategy. As interest rates rise and the economy becomes more volatile, the private equity model becomes less stable. Additionally, private equity firms that were very active recently may have cooled on acquisitions to focus on growing the portfolios acquired over the last few years. While private equity deals are still happening, they are progressing more lethargically and cautiously, with increased due diligence. On the other hand, strategic buyers are companies that are already operating in a similar area of business as the target company, and these buyers have a calculated reason and high motivation to acquire the specific target. The motivation for entering these deals is not purely financial, and these types of deals have been less affected by shifts in the economy.

Increasing enterprise value

From a corporate governance standpoint, solid organizational documents, including a shareholder agreement where relevant, should be adopted and a chain of title for any stock that is issued, transferred, or redeemed should be maintained. Corporate formalities, such as documenting annual director and officer elections, should be followed. While it may sound obvious, companies should also ensure that they maintain good standing in each state where they transact business.

In the employment context, having a solid management team is critical to increasing enterprise value. Founders should be strategic in incentivizing the management team and other key employees, including by providing equity and equity-based compensation. Engaging a solid human resources team and employment attorney can help to avoid costly wage claims and issues regarding the misclassification of employees, which could hinder a future transaction.

Issues with real estate, whether leased or owned, can easily hold up a transaction and should be addressed early on. Leases should be reviewed well in advance of a transaction to determine whether assignment of the lease is allowed and whether landlord consent is required (especially in the context of a potential asset deal). If real estate is owned, the company should ensure that old encumbrances resulting from loans are properly terminated and that such termination is recorded.