There are various reasons that business owners decide to exit. Sometimes it is an external factor that provides the impetus – wishing to capitalize on a hot market or receiving the long-anticipated call from the big industry buyer. Or sometimes it is an internal realization that the time has come to reduce personal risk. These owners recognize the problem of having most of their personal net worth tied up in a single illiquid stock and are also looking to break free from the pressures of loan guarantees, lease commitments, and insurance policies. For others, it is just that they are ready for the next challenge and are looking to generate the capital needed to get going.
Once the decision has been made, how best to ensure a successful outcome? Based on our experience working with middle-market business owners around the country and in varied industries, a few pieces of advice rise to the top:
Know what your company is worth before you begin
Invest the time and effort to be fully prepared
Execute a carefully managed process
Rely on an experienced team of professional advisors
Unfortunately, 83% of business transitions fail to reach the finish line. A company like Mastery Partners can help you accomplish all these tasks and ensure that successful outcome. With over 100 successful transactions, they help business owners define the ultimate exit strategy and execute a plan to transition on their terms.
What’s my company worth?
For most business owners, valuation expectations are based on multiples they have gleaned from industry rags or overheard at the country club, or a number they have arbitrarily set as a personal target. In reality, the actual price a buyer pays will be based on a combination of the measurable factors that comprise the company’s future earnings potential – its competitive advantages, growth prospects, margins, cost structure, capital requirements – and market forces, including the availability of viable buyers and expected returns on investment.
Since we work with buyers and sellers every day, we are able to give an owner a good idea of likely value based on the company’s specific circumstances. We will never go to market with an asking price, which only sets a ceiling; however, it is important to set realistic expectations on the front end. If the likely number is not acceptable to the owner, it’s not the right time to sell and we can provide guidance on concrete steps to enhance value.
We also recommend owners talk to a financial advisor to determine the sales price that will meet their personal goals. A qualified advisor can match an appropriate investment strategy with the anticipated cash needs of the seller, both immediate (e.g., purchasing a lake house, paying off debt) and to sustain a desired lifestyle. Of note, the resulting target number is often less than the owner anticipated given the available tax and investment strategies.
Preparation makes perfect
A successful sale is not executed overnight. Wiring funds to an owner’s bank account is merely the culmination of a months-long process. Many owners underestimate how long it will take to sell their business, primarily because they haven’t accounted for the comprehensive preparation that is key to retaining an edge in the deal process.
Why is preparation so important? Because once in the market communicating with potential suitors and capital sources, momentum is the seller’s friend. Controlling timing, maintaining third-party enthusiasm, and avoiding due diligence surprises – rarely positive in a process – all enhance negotiating leverage and minimize the risk of unforeseen internal or external factors derailing the deal.
Preparation begins with the company’s financials and operating data. Accurate and detailed financial statements are a must, as well as robust reporting systems that will allow the company to slice and dice its numbers – by customer or product or region, for example – in response to buyer questions. Delays while a seller tries to answer questions interrupt the momentum and can even raise questions among buyers as to management’s knowledge of the business.
Investing in a third-party quality of earnings report (QoE) prepared by a recognized accounting firm pays dividends by validating normalized earnings, identifying adjustments to historical results that can increase valuation, and leading to smoother buyer diligence process down the road.
Comprehensive preparation can also uncover bad news or vulnerabilities. The company that identifies these matters upfront avoids losing transaction leverage if the buyer is the one who makes the discovery later in the process. At best, the buyer is likely to use these facts to reduce his offer. At worst, he might construe the seller was being disingenuous in attempting to hide important details.
Rifle shots, not shotgun sprays
Although few financial advisors will admit it, widespread auctions, while appropriate for public companies, are ill-advised for privately-held businesses. Why? They can actually cause considerable harm. Auctions are built on the notion of generating broad market knowledge of a planned sale, which can be used against a company by its competitors. Customers and vendors may also be reluctant to expand their relationship with a company they suspect is on the block. And rumors can spread discord and fear among employees who, in the worst case, may opt to leave for a competitor (and it is likely to be the best employees who have the easiest opportunity to leave).
Here, the Hippocratic Oath – Do No Harm – provides great guidance. There is always a chance a transaction won’t close, whether due to unforeseen external factors, a lack of buyer interest, or simply because the owner wakes up and changes her mind. If there is no deal, an owner may well be left with damaged goods as a result. Instead, running both the process and the business from the perspective of continued ownership – as if a deal won’t happen – is the best way to preserve the company’s value.
When it comes to running an effectively managed process, the hunt should be organized using a rifle-shot – rather than shotgun – approach to engage with potential investors or buyers. No matter the attractiveness of the business, there are unlikely to be 50, 60, or 100 viable and interested suitors. Corporate buyers and private equity groups have their own product or service biases, geographic footprint, and culture, not to mention financial capacity and interest in making strategic investments. Knowing the audience, and tailoring the pitch accordingly enhances credibility and generates competition even with a smaller number of participants. A horse race among a select group of qualified suitors that recognize the fit and believe their time will be well spent is the most direct path to maximizing value while at the same time protecting the entity’s value
Draft a championship team
When it comes to selling a business, going it alone is ill-advised. Most business owners have never been through a sale transaction before, and yet the people on the other side of the table are likely to be seasoned dealmakers. For something as important as this, the owner should assemble a team of professional advisors who can level the playing field.
This means an experienced attorney who focuses specifically on business transactions; wealth management, tax, and estate planning advisors who can plan appropriately for the expected proceeds; a CPA or an accounting firm who can prepare the quality of earnings report in the expected format and manage questions from the buyer’s own diligence provider; and an M&A advisor who can drive a targeted process to maximize value.
Good M&A advisors support their clients from start to finish. From facilitating the discussion around key deal objectives, articulating a compelling growth story for the intended audience and ensuring the company is prepared for diligence, to controlling information flow, negotiating the best available deal terms, and coordinating multiple parties through diligence and documentation, the right advisor unlocks value at every stage of the process.
Professional advisors add real value in helping owners reach their goals, not because they are any smarter than their clients but because, having completed hundreds of transactions over the years, they have experience on their side. Assembling the right deal team dramatically increases the certainty of reaching the finish line, and on the best price and terms available in the market.
A sale typically represents the most significant capital event in an owner’s life. It deserves careful thought and preparation, and a process designed to achieve the specific objectives of the individual or family. The secret to success is to surround yourself with experts, remain in the driver’s seat, maintain momentum, know what you are selling, have data and facts at the ready, and keep potential buyers honest through a discrete but competitive process.
ABOUT THE AUTHOR
Oliver Cone is Senior Vice President at Bulkley Capital, LP an M&A and financial advisory firm based in Dallas. Bulkley Capital works with owners and management teams of successful middle-market companies throughout the country with earnings in excess of $3 million to design and execute customized sell-side, acquisition, and capital raising transactions. Learn more about planning for and achieving liquidity at our series The Path to Private Company Liquidity: A practical guide to M&A for business owners and visit us at bulkleycapital.com.
