Practical tips for M&A transactions – the buyer’s perspective
BayWa r.e. Bioenergy GmbH focuses on all aspects of biogas and biomethane plants within the BayWa r.e. Group. BayWa r.e. is a wholly owned subsidiary of BayWa AG and is one of the leading developers, service providers, wholesalers and suppliers of energy solutions in the renewable energies sector. The BayWa Group generates total annual revenues of €17.1 billion. Christian Bracklow is the Managing Director of BayWa r.e. Bioenergy GmbH and, together with his employees, is responsible for the development of new projects and the acquisition of existing plants across Europe.
Holistic transaction advice by entrepreneurs for entrepreneurs!
Steinbeis M&A www.steinbeis-finance.de/en offers its clients a comprehensive and professional range of consulting and services in the areas of (1) Mergers & Acquisitions (2) Buy-and-Build, (3) Strategy and (4) Capital Advisory, across all industries. Clients are in particular medium-sized entrepreneurs, companies and groups of companies in Germany and abroad, but also international groups seeking to establish themselves in the SME market. Steinbeis M&A currently has 17 partners who have completed well over 200 successful transactions in recent years. Steinbeis M&A, with offices in Frankfurt, Stuttgart, Hamburg, Cologne, Berlin, Munich, Karlsruhe, Vienna (A), Zurich (CH), Palma (ES) and Palo Alto (US), is an independent consulting firm of the Steinbeis Group www.steinbeis.de
Steinbeis (Staudt):
A good year ago, we approached you and BayWa r.e. as Steinbeis M&A regarding an entrepreneurial succession solution for one of the largest biomethane plants in Europe and were able to successfully conclude the transaction together in summer 2020. What criteria are of particular importance to you when a new investment or an acquisition is proposed to you?
BayWa r.e. (Bracklow):
From the buyer’s point of view, especially at the beginning, there are not only questions about the technological framework data, the economic aspects (maintenance status of infrastructure, cash flow-oriented contract analyses, financing, etc.) as well as legal aspects and the contractual framework of the transaction, but also about the ability and the will of the seller and his advisors to accompany the upcoming transaction process professionally and purposefully.
Steinbeis (Staudt):
Could you please elaborate a bit on this, as it might not be obvious to most small and medium-sized enterprises (SMEs) with an annual turnover of up to 50 million euros and only limited M&A expertise.
BayWa r.e. (Bracklow):
In most cases, only larger SMEs and corporate groups have an independent, in-house M&A team, which on the one hand has essential expertise and the necessary experience and on the other hand can successfully fulfil the role of intermediation with the right mix of soft skills when approaching strategic investors. Smaller SMEs need to fill this gap with external advisors. For the seller of an SME, the benefit lies not only in achieving a higher price, but rather in gaining expertise and negotiation techniques that make an effective and ultimately successful transaction conclusion only probable. Nothing is worse, for both sides, than a transaction that turns into a never-ending stalemate after many months. Sometimes no one knows how to move forward (e.g. because of red lines and the threat of losing face) or how to steer back in a controlled manner (“We have already invested so much time and money”).
“An experienced advisor with transaction expertise can enrich these situations with approaches to solutions.”
It is not uncommon in a complex transaction process, especially in advanced negotiation phases, when a certain initial euphoria has faded, for situations to arise that the seller cannot resolve on his own. This significantly increases the risk of the transaction being aborted. In addition, expert accountants and tax advisors must always be available and experienced legal advisors from the seller’s area of trust must be involved. However, their focus is usually limited to the respective area of expertise and this can quickly lead to a lack of focus on balancing the interests of both sides. As a result, more complex negotiating positions regarding economic or contractual issues are often only partially addressed and solved in a suboptimal way or they lead to one-sided and thus irreconcilable negotiating positions. An experienced advisor with transaction expertise can enrich these situations with solution approaches, defuse conflict potentials and successfully put the process back on track and get it running again.
Steinbeis (Staudt):
If I may summarise this once again, you are saying that for a successful transaction not only the characteristics of the target company must fit, but also the toolbox (transaction know-how) must be well filled and the expertise in process support must be available. It is important to the buyer that in the foreseeable event of a crisis a reconciliation of interests between buyer and seller appears possible. If this is not the case, no professional buyer would commit his resources (management time and costs) to the transaction marathon of the M&A process without pre-contract commitments that are unfavourable to the seller. Negotiations for an attractive company in terms of technology, market position and fair valuation may even be terminated early if the sellers do not have the credibility to seriously close the transaction.
BayWa r.e. (Bracklow):
That is correct. Both on the buyer’s and the seller’s side, after a non-binding initial phase characterised by teaser & loI, a detailed company analysis (product, history/balance sheet, business plans, market position/ SWOT analysis) will have to take place very soon, concerning all aspects of the company valuation. As a buyer, we expect the seller to provide a transparent company presentation (InfoMemorandum), which is to be exchanged after signing a confidentiality agreement. After analysing this data and if our investment criteria are met, we normally submit a non-binding offer with a conditional purchase price indication. Once this offer has been accepted by the seller, including the release of the data room and due diligence processes and, in particular, the start of contract negotiations, the transaction marathon really begins and high costs are incurred on both sides. In this respect, it is already highly relevant to be able to trust the seller with regard to the transaction process when submitting a non-binding offer.
Steinbeis (Staudt):
Does BayWa r.e. sometimes acquire small and medium-sized target companies without an M&A advisor, or are there advantages to this approach in your view?
BayWa r.e. (Bracklow):
Of course, we first look at all opportunities that reach us directly or through advisors and that at first glance meet our catalogue of investment criteria. We start with a desk-top analysis and initial discussions with the contact partners. However, before making a non-binding offer, we have to decide whether the seller is really willing and able to go through with the transaction. As far as the assessment of “willingness” is concerned, advisors can admittedly even be disruptive at this stage.
The personal conversation with the seller’s direct representative is essential here. But when it comes to “ability”, M&A advisors come into focus. In this respect, it can be stated that target companies with M&A advisors have dealt significantly more with the subject matter, the process stages and possible pitfalls than sellers who enter the transaction marathon alone or only with their tax advisors and core business lawyers. Surprisingly, the bottom line is not much different when we sell projects or companies (which for us is part of our business model due to greenfield project development and realisation and is therefore carried out by in-house specialists). Without buy-side advisors, it sometimes gets tough if the buyer does not have sufficient industry and/or transaction experience.
Steinbeis (Staudt):
How do you explain this difference in the assessment of success, which is ultimately decisive for whether and in what form you would like to make an initial offer for the target company at all?
BayWa r.e. (Bracklow):
In addition to expertise in solutions and intermediation, a key factor is the M&A advisor’s holistic, pro-active view of the transaction and focus on a successful closing. This means that the M&A advisor examines the seller in advance and knows how to address weak points. In individual cases, it may make sense for the seller to commission a vendor due diligence even before the market approach begins. If the relevant reports are available at the beginning of the transaction, this massively increases credibility for us and we can reduce safety margins and risk buffers in the modelling. If, following the non-binding offer, extended access to detailed operational documents is required, critical issues always arise which, without a moderator or experienced negotiating partner on the part of the seller, can often lead to tensions or even the termination of the transaction. This is then very annoying.
Steinbeis (Staudt):
Could you explain this a bit more? Isn’t everything still being negotiated anyway? The purchase price can change up to the last second. The transaction is only finalised when the share purchase agreement is formally signed, isn’t it?
BayWa r.e. (Bracklow):
It is of course true that many contractual aspects and influences on the purchase price remain open for a long time. However, by indicating the purchase price in the non-binding offer and the seller’s acceptance to enter into negotiations, both sides have already agreed in principle. If, in the meantime, new information comes to light that substantially influences the valuation or if the buyer has even calculated on the basis of false information, there is quickly a threat of termination. Then it is important to keep a cool head on both sides and see whether the effects can be countered with structural adjustments (e.g. guarantee catalogue). If the seller negotiates without an M&A advisor, he is often blind to such ways out and may break off out of frustration.
Steinbeis (Staudt):
Thank you for accompanying us on this excursion into the depths of the transaction marathon and the motivation of both sides. The essential advantages of a professional M&A process for both sides, buyer and seller, have become much clearer. Company valuation, presentation and also aspects of tax law and contract law are always only partial aspects which, seen alone, cannot guarantee success. Ultimately, only solution-oriented negotiation can make a successful conclusion possible. In this respect, the seller’s advisor in particular is called upon to point out alternatives at any time and to negotiate a realistic result. In order to make a non-binding offer to the seller, it is essential for the buyer to see that the seller and the advisor bring both to the table: Will and ability.
