July 15, 201991-94440 18040suresh@ensoconsultants.com

Why, M&A of Private Business, different?


What is an SME, Private Business?

Any business with a revenue of INR 1 Cr to 300 Cr (USD 500K to 50 Mn) and is not listed in Stock exchange as Public Limited firm can be called a Small, Medium Enterprise and are usually Private Limited firms or Partnership firms. It can be a Chain of restaurants, a hotel, a trading house, Manufacturing unit, a retail show room, an IT company, a Hospital, Chain of clinics or Laboratories, professional services organization, OEM component supplier, Import/Export houses, transportation agencies, an ecommerce venture, Hi tech firms, Bio medical firm, logistics firm, Health/wellness clinics, pharmaceutical or chemical unit, Auto garages or service centers. They may be young organizations, less than five years old or may have a long presence for over 50 years witnessing multiple economic cycles with a loyal customer base and a brand image.  M&A of SME and private business poses many challenges.

We see the statistics of success rate on M&A of various Businesses as

  • Owner managed M&A- 2% Success Rate
  • M&A Brokers for SME, Private Businesses- 2% to 5% Success Rate
  • Investment Bankers for Large Private Businesses, Public enterprises- 90% Success Rate

When the success rate of M&A for large public enterprises show a very high rate despite its complexity and size, one wonders why small and medium businesses are not that successful with or without a middleman.

Dynamics of M&A for Private Business is Different

The dynamics of buying or selling a SME Business is quite different from that of buying or selling anything else and is a major decision for any buyer or seller. Unlike a real estate or a car or anything else, selling a business is more complex as no one can exactly figure out its value. The business is worth as much as the value of opportunity the buyer perceives.  Off course financials or valuation might play a role but is not the only reason for selling or buying a business. The business is the extension of its owner, his passion, his emotional attachment to own and nurture his business is equally important in buy/sell decisions.

Investment Bankers handle large Public or Private Placement deals of 100, Mn USD plus and follow a structured M&A process and get best results. The SMEs on the other hand, have a turnover of 500K to 50 Mn USD and often go unsold or end up in a distress sale with a very low hit rate of 2% whereas Investment bankers get 90% plus success rates.

After all any business is a business with certain track record and credentials, irrespective of its size, and the M&A deals should not give diametrically opposite results for SME sector.

The reasons are quite simple. Investment bankers do not handle Small ticket M&A and follow systematic processes to profile the seller, different types of potential buyers, conduct appropriate valuation and suggest the right timing for listing and maintain absolute confidentiality. On the other hand, standard Business brokers try and sell a SME business like any real estate or an automobile, in a simple aggregator platform. The results are very low success rate and more often a distress sale.

It is important to follow the processes and methodologies which typically make the large sale successful, for positioning SME firms for Buy or Sell and target the right buyers who could see the value in the business. Different people value the business differently and only the right buyer can offer the right price when he sees the opportunity in your business. We need to know and follow what Investment bankers do to a Large Business M&A and adopt the same to position SME Businesses for M&A

Why do we need External Consultants?

A professional approach to M&A can enhance the value of your firm and improve the success rate by getting a right buyer or seller willing to offer the right price. The process will involve external M&A consultants to advise you on the process, Valuation, due diligence, deal structuring and post-merger operations, an Attorney to get the legal process of M&A validated and an Accountant to advise you on taxation issues. You can know the timing for buying or selling and understand if the value of the firm could be enhanced before listing it for sale.

By P.N.Suresh, CEO, ENSO CONSULTANTS, a Management, IT Consulting Firm

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