Fallacies and Myths in the M&A World The merger and acquisition boom of the past few years has motivated many middle-market companies to evaluate their own situation and options. Unfortunately, there are some widely held misconceptions about corporate finance that prevent business owners from understanding and pursuing the full range of strategies available to them. This article will identify and address several common misunderstandings that need not hinder your succession planning process. One of the most common fallacies perceived by not only business owners, but also most business professionals, is that debt is a significant barrier to selling a company. It is often said that a company with debt appears to be weak or struggling and cannot be generating a substantial profit. Contrary to that belief, many profitable middle-market companies employ debt to finance capital expenditures, develop infrastructure, and diversify the owner’s investment risk. Debt is also the least expensive capital available because of the security of the instrument, liquidity of the debt markets, and tax deductibility of interest expense. Eliminating debt is an astute use of capital when your interest expense to service the debt exceeds your rate of return on alternative capital investments. Remember, the objective should be to use the funds generated from profits to maximize a return on your investment. Prudent debt usage and building a business culture that effectively manages leverage will increase your enterprise value, and should not impede your ability to sell your business. Another common myth in the world of mergers and acquisitions is that selling a business is an all-or-nothing proposition. In fact, there are many alternative means of obtaining liquidity from a business, most of which are not a full sale. Think of each business as having a life cycle – owners must build succession plans to transition their businesses through that life cycle. The key is to identify your own objectives before you approach the process. If your goal is to reduce your personal risk exposure to the company without ceding control of the business, perhaps a minority equity investment or leveraged recapitalization is the appropriate strategy to pursue. If you are planning to retire within five to seven years, selling a majority stake to an investor group, remaining active in the company, and maintaining a minority ownership position may facilitate your move into retirement. In that scenario, your minority stake can also become quite valuable if the company grows significantly. The sooner you begin to identify and evaluate your opportunities, the better you can plan to capitalize on them. The biggest myth widely perpetuated in today’s business world is, “the best deal is right around the corner, let’s wait it out.” Although you may have received numerous proposals and offering letters from potential acquirers interested in your company, don’t assume that these offers are limitless because the market has grown in complexity and size. Involving a professional advisor in the planning stages is crucial to ensuring that you are making the best choices for your company. Professional guidance will provide a sense of security and ease that you are on the right path for your company. When you are confident that the time is right, the best manner to enact a transaction is to identify the entire universe of potential investors and create a competitive auction process to maximize the value of your business. Dispelling fallacies and myths in the merger and acquisition world is essential to maximizing the value of your company and pursuing your optimal investment strategy. Addressing these questions and erroneous beliefs with a professional advisor will help you properly plan for the next transition in your business’s life cycle. Mikel Harding Managing Director Cohen Capital Advisors, Ltd.