Selling a business is rarely a straightforward endeavor. There are operational considerations, emotional considerations, and market considerations. Does your company have any red flags or risk factors? How can you increase valuation? What do you plan to do after sale?
We recently sat down with Adams Price and Bill Nack, managing directors at The Forbes M&A Group (an Axial member), to discuss tips for CEOs preparing for a liquidity event.
Make sure you have a good management team in place.
“The organization’s value should be in the organization itself — not the grey matter in the owner’s head,” says Price. “There’s a tendency for business owners to try to run every facet of their business. They may be very good at that, but there’s risk perceived on the part of the buyer if everything goes back to the owner. The value of the company becomes lower to compensate for that risk.”
“It takes time to develop a strong management team,” adds Nack. “We suggest to clients that they should be thinking about a divestiture years in advance. Unless you plan on owning your business until the day you die, you should always be thinking about your exit strategy.”
Engage an outside accounting firm.
“Make sure your financial processes and accounting methods are strong,” says Price. “One of the first questions we’ll ask a business owner is if their books are reviewed or audited by a reputable CPA firm. If a CEO says, ‘My cousin’s a CPA and he does my books,’ that can be a red flag.”
Before a buyer goes out to market, they should have a third-party firm do a quality of earnings review. “This allows us to discover anything someone else is going to discover in due diligence — so we can either fix it or message around it,” says Price. The quality of earnings report “basically tracks the cash going through the business, and verifies the consistency of those earnings.”
“The goal here is disclosure, disclosure, disclosure,” says Nack. “That way you can tackle these issues head on.”
Think about whether you want to leave.
Every CEO should think about what they’re trying to accomplish with a sale, says Price. “Where do they want to be in five years? What role do they want to have post-transaction? Are you looking to pull the ripcord and leave now? Or, are you looking for a partner to realize further financial or operational goals?”
The answers to these questions, says Price, have “a big bearing on how you position the company to the marketplace.”
Often, CEOs will still be weighing their options when they first meet with an advisor. “It’s incumbent upon us to help them understand the consequences of both options,” says Nack. Private equity firms will typically require a management team to stay on board; if the management team wants to leave, then it’s time to focus on strategic buyers. “A strategic buyer will likely tolerate a weaker or more uncertain management team, because they’ll have the ability to insert their own people.”
Don’t believe everything you hear at cocktail parties.
“CEOs may hear multiples at parties or trade shows — that someone got 8x or 10x or 12x EBITDA for their business — and think that that’s what their business is worth too,” says Price. “But you always hear about businesses that sell for a ton, and rarely hear about those that sell for the market average.”
A company’s management team, earnings, and strategic plans all help establish the value of a business. “We figure out what value range a business owner can expect at a specific time in the market, then help them understand how to maximize their company’s value within that range. We bring specific buyers to the table in a competitive format so that they’re trending toward the higher end of the range,” Price says.
Take external factors into account.
“Every business is different,” says Nack. “Every business is going to have different sensitivities based on the macro marketplace as well as its current management situation. For example, we’re seeing really fantastic multiples for infrastructure companies and tech and SaaS companies. There are great multiples in particular for ‘Internet of Things’ companies. On the other hand, if you’re an oilfield services company, right now is not the time to sell. It’s not only not the time to sell from a valuation perspective, but there are no buyers out there. Few are acquisitive in that space.”
Nack also added, “On the macroeconomic side, interest rates are low, so buyers can take more debt on a business — and therefore valuations are up. So now is a great time to sell for many business owners because of all the money that’s currently in the marketplace.”
A good M&A advisor will tell you if it’s not the best time to sell. “We have no problem telling someone that they’re not going to successful going to market right now, whether as a result of external or internal factors,” says Price.
Don’t inoculate the market.
“Sometimes, sellers decide to go out and play in the market a bit,” Price says. “They’ll talk to a few people, but the conversations will end, whether because of lack of sophistication of process, or disconnect on valuation. When a buyer walks away from a deal like that, it can be very hard to get them to re-engage.”
“Once, we were going out to market on behalf of someone, and we went to a private equity group. The PE group said, we’ve talked to that guy three times — we’re not talking to him again. The seller inoculated the market in that case. He spoiled it before we could take his business out in a more sophisticated way.”
Realize that the process will take time.
“It can take 8-12 months to find the right buyer for a business, and get the deal done in a manner that’s beneficial to both parties,” says Price. “It’s an intricate process.”
“Some CEOs come in and want to sell their company in a month and a half, and we have to disabuse them of that notion. It’s important for them to understand that this is a process in its own right. This may be a second job of sorts for a little while, which can be nerve-wracking. We help take a lot of that load off them, but they’re still highly involved in the process.”
An advisor will help make sure the owner “doesn’t waste time” in the sale process, says Nack. “We have a process to sift through potential opportunities, and only bring buyers into the discussion where there’s a high potential of something happening.” Advisors coordinate conversations in such a way that “someone can submit an Indication of Interest (IOI) without having to have an in-depth conversation with the seller. We make sure a buyer is serious and capable of doing the transaction first — which is often the opposite of how it works when a seller tries to sell their company without representation.”
By Meghan Daniels, Axial