M&A with Private Companies
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It seems that M&A with publicly traded companies is way more complicated than privately owned businesses. What are the common obstacles or areas to be extra mindful when conducting M&A for private company?
I think the most important aspect where due diligence should pay much attention in a privately held target company is the exact involvement of the shareholders and relations with the company. Debtors and liabilities should be carefully checked during the due diligence phase by experts to see of there are any debts of or liabilities to the shareholders. Apart from that, a proper due diligence in all fields should take place and be more careful and scrutinising than in a pyblicly listed company as public companies tend to be more transparent.
I think private company M&A has several unique challenges too. The biggest difference that comes to mind is lack of transparency compared to public companies. Without publicly available financial data, due diligence becomes trickier. Also, valuation can be more subjective without the market’s pricing signals.
In my experience within engineering and utility, I’ve noticed a lot of private M&A is primarily strategic instead of simply “buy low, sell high.”
For example, 1 transaction I witnessed was a PMO firm Purchasing another in an effort to become a prioritized vendor for a major utility client. The purchasing company was national but did not have a strong presence in the South East, which they made up for when they acquired a small competitor who had a framework with a major utility in the region.
Another example, A PMO firm purchased a small IT consulting agency, in an effort to hire the owner. They previous owner is now the Chief Technology Officer for the firm.
In private M&A, I’ve often seen smaller companies purchased “for parts” instead of a positive ROI
I agreed with what has been previously stated… with private companies there are many areas of risk and in my opinion require a deep due diligence to make sure you are protecting your company from potential issues. We have seen everything from unethical money management, poor compliance and security to not understanding legal requirements. Most of what we have seen is not done with malicious intent but more of a lack of knowledge which still needs to be planned for to mitigate the risk to your organization.
Hi Jay,
You’re right that M&A involving publicly traded companies often comes with additional layers of complexity, such as regulatory scrutiny and shareholder approval. However, M&A for private companies has its own set of unique challenges that require careful consideration.
One common obstacle is the lack of publicly available information. Unlike public companies, private companies don’t have the exact disclosure requirements, making it harder to gather comprehensive data during due diligence. This means you must be extra thorough in your investigation, diving deep into financial records, customer contracts, and operational details to get a clear picture of the company’s health and potential risks.
Valuation can also be tricky. Without a market price, determining the fair value of a private company requires detailed financial analysis and often the input of valuation experts. Both parties must agree on the valuation method and the assumptions used, which can sometimes lead to prolonged negotiations.
Another area to be mindful of is cultural fit. In private companies, the culture is often closely tied to the founder or current owners, and changes can significantly impact employee morale and productivity. Ensuring a smooth cultural integration is crucial to maintaining stability and achieving the desired synergies.
Legal and regulatory considerations can also pose challenges. Private companies may not have the same legal and compliance infrastructure as public companies, potentially leading to undiscovered liabilities or regulatory issues. Conducting thorough legal, and due diligence and addressing any compliance gaps early in the process is essential.
Lastly, stakeholder management is critical. Private company owners may have different priorities and emotional attachments than public company shareholders. Aligning interests and managing expectations requires careful communication and negotiation.
While private company M&A can be less public and sometimes faster, it requires a meticulous approach to due diligence, valuation, cultural integration, legal compliance, and stakeholder management.
I am looking forward to hearing others’ experiences and thoughts on this!
My experience with private companies, especially in lower-middle market deals, the exposure comes with financial data integrity, customer concentration (in certain industries) and the role(s) of key employees including founder, management and critical individuals.
Hi Jay, al the point above are excellent and I have encountered them in the M&A my company does. We are an engineering consulting firm and only do small, private M&As. We have learned many of the lessons taught here the hard way.
For successful close of a private M&A, valuation is key, as is the true financial health. Many of our deals have not closed due to lack of agreement on these two items. Many small (10 – 20 people) company owners do not have the business experience to adequately understand the valuation the market puts on their business. Their view reflect their personal commitment, not the greater market, and the discussions will get emotionally charged. Financial health is another. These are not companies with huge debt loads as banks don’t carry small firms for long. But a positive balance sheet at the end of the year does not mean the company is healthy.
A greater challenge come post close, as private firms coming into much larger firms, or into public firm, WILL experience culture shack, regardless of how well you prepare and change manage. The cultural integration is always the biggest challenge and need robust discussion and agreement on the integration plan, then it needs to be demonstrated by your AND especially the the NewCo leadership to be effective.
In my view, in private companies there are few heavy weights who hold key information which is a challenge plus there is no pressure of reporting it to market or governing authorities hence sticking to timeline can be another challenge.
One of the bigger challenges with privately held companies more so then those publicly are the soft factors. in my experience, non-public companies such as privately held or non-profits, tend to have a culture centered around the ownership and take on a family style culture. when integrating the culture, it is ever more important to have a plan to bridge the gap with any target organization to not lose the sense of “family” in these types of organizations.
As mentioned above, because private companies are usually more family driven, M&A processes are usually more flexible, less sophisticated, and less focused on deep diving into the target’s financial performance, regulatory compliance, or even the formal nature of the share sale or merger. This leads to major risks and hidden challenges, and usually, even the purchaser is not willing to spend finances or time on making sure that the acquisition actually makes sense. Also, the board is usually family governed, leading to heated complications. In my view, it has its own form of complexity based on the human element.
Yes, Public traded companies are more complex as they usually tend to be a larger business entities as a result of their ability to raise capital from public investors not to mention the regulatory bodies that will overseen the M&A transaction
Hi!
In my experience with more than 20 private equity deals, these are 10 key challenges:
1) Valuation Challenges: Without market pricing, agreeing on a fair value is difficult, and financial records may be confused and unreliable.
2) Due Diligence: Private companies may lack comprehensive documentation, increasing the risk of undisclosed liabilities.
3) Ownership and Control: Complex ownership structures and informal governance can complicate negotiations.
4) Cultural and Operational Integration: Strong, founder-led cultures and differing operations can lead to integration challenges.
5) Confidentiality: Maintaining secrecy is crucial, limiting due diligence and negotiation transparency.
6) Employee Retention: Retaining key personnel is vital, requiring careful incentive structuring.
7) Legal and Regulatory Risks: Informal contracts and compliance issues can pose legal risks.
8) Financing: Complicated deal financing and structuring.
9) Customer and Supplier Relationships: Dependence on personal relationships may disrupt business continuity.
10) Tax Considerations: Complex tax structures and the choice between asset vs. stock purchases impact deal attractiveness.A few observations from having worked both at a private company that was founder-owned and led that was going through an M&A with a much larger company; and more recently with several larger public companies that have engaged in M&A’s: 1) Don’t underestimate how ‘valuable’ the business is to a founder-owner; the value story for them goes beyond economics as there is sometimes an inner struggle they’re managing akin to letting one of their children go to another family. Also, depending on ego, letting go of total control of the business is sometimes a complicating factor. 2) Private companies are often smaller and have a more familial culture with employees that prefer that to a large ‘corporate/buttoned-up’ culture. 3) Finances are sometimes ‘fuzzier’ than publicly traded companies, extra effort on due diligence to turn over all the stones for a full view of what’s really beneath.
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