M&A with Private Companies
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I have experienced that with private companies that have merged there was not significant urgency to complete the integration in a timely manner. There is not the weight of shareholder value to take into consideration.
The most common issues I have found relate to a lack of or very weak internal controls in privately held companies. Further, financial reporting management is often outsourced with the main focus being tax reporting. When acquired by a publicly held company, this can cause significant audit issues, compliance with US GAAP or IFRS reporting guidelines as well as Sarbanes-Oxley.
Really good insights shared by everyone, thank you. I guess all these challenges and their risks are reflected in their lower valuation multiples. My goal is to enable deal flow for cross-border deals (I’m based in UK/EU) which comes with even more challenges given the accounting and cultural nuances in each country.
Acquiring a private company comes with unique challenges that require careful navigation, particularly in areas such as valuation, due diligence, ownership structure, and cultural integration. Anticipating and addressing these challenges is key to facilitating a smoother M&A process and achieving successful post-acquisition results.
M&A involving private companies can be more murky than those involving public companies due to the inherent differences in information transparency and the quality of data keeping. Public companies are subject to stringent disclosure requirements, which mandate the release of financial information, operational data, and other relevant details to investors and the public. This transparency provides potential acquirers with a solid foundation for evaluating the target company’s value and potential synergies.
In contrast, private companies have more flexibility in disclosing information and data keeping and quality depend on size. They are not required to adhere to the same level of transparency as public companies, which can make it challenging for potential acquirers to obtain accurate and comprehensive data. This lack of information can lead to difficulties.
While the initial question focused on the pre-deal M&A process, it’s essential to highlight the challenges of post-deal integration, especially for smaller and mid-market companies. M&A experience and skills are often hard-won, and many organizations struggle to effectively execute a successful integration. Additionally, depending on the organization, the quality of information received during the due diligence process may or may not be as accurate as thought once the integration proceeds. Public companies may have more hoops to jump through, but there is a level of quality and transparency in the information.
While M&A with private companies may seem simpler than with publicly traded ones, there are still significant challenges to be mindful of:
Lack of Transparency: Private companies aren’t required to disclose as much financial information, so due diligence can be more difficult. You need to dig deeper into financials, contracts, and liabilities.
Valuation Discrepancies: Since private companies don’t have public stock prices, agreeing on a fair valuation can be tricky. Both sides may have differing expectations.
Ownership Structure: Private companies often have more complex ownership structures, such as family-owned businesses, which can create emotional or personal hurdles in negotiations.
Cultural Fit: The cultural alignment between a larger acquiring company and a smaller, privately held company can also be a challenge. This can affect post-merger integration if not addressed early.
Extra care during due diligence and clear communication throughout the process are essential for a successful deal with private companies.
From my perspective, the involvement of shareholders and owners is key. Especially when you plan to continue working with them for a specific period, they need to feel involved and respected. Especially in smaller privately owned companies, the employees and their knowledge is very important. You should focus on not losing them and having a knowledge transfer right at the beginning in case some key employees thinking about leaving.
Private companies often present different challenges due to the lack of formalized structures. In my experience, focusing on aligning leadership first sets the tone for a smoother integration.
This is a great question! It is my experience with privately owned businesses, they usually lack the experience and expertise because it’s their first time going through a due diligence process, so there can be a strong reluctance to share information. And even if they share information, there is not always a sense of urgency to share information, so deadlines are often missed. There is absolutely a risk of finding a lot of skeletons in the closet once the deal is signed and so I think it requires a high-risk tolerance.
It might be helpful to briefly mention how M&A with private companies differs in terms of negotiation and shareholder dynamics.
One key element in private deals is the ability to properly conduct a valuation. Targets can vary hugely, even within the same industry based on management decision making. Another variable to highlight is the sensitivity of confidentiality, given today quality employees and skilled labor can be challenging to retain and hire.
There are no challenges, they even have parts of their in-house-GAAP clearly laid out on sticky notes on one of the computers.
Similar to what others have pointed out here. Public companies’ reports are pre-vetted for you by big 4 firms or similar quality(however, that has not saved them all). Private companies’ data quality varies a lot.
Also, not underestimating how different it can be to achieve continuity of historical earnings. It’s not impossible, even for an “absentee” owner, to effectively bring in 100% of the sales in small to low mid-market businesses. The owner does it on these boat and golf trips you agreed to put in the add-backs too!
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