Know When to Hold ‘Em, Know When to Fold ‘Em

Professional Advisors and Buyers Shared First-Hand Experiences with Selling a Business and How to Avoid Common M&A Pitfalls

The Forbes M+A Group was pleased to moderate a panel of business owners and professional advisors who recently have been through the process of selling a business. During this free event, the guest speakers shared candid, first-hand stories of their personal successes and failures, as well as advice they would give to other business owners considering selling a company. The “war stories” shared proved to be extremely enlightening and attendees walked away armed with a deeper understanding of what it takes to close a successful M&A transition.

What Does the Market Look Like?

Adams Price, Managing Director of The Forbes M+A Group, began the program by asking panelist, Nate Raulin, Vice President of Excellere Group, to discuss current market dynamics. Nate explained that it was a seller’s market with lots of strategic buyers and readily available financing. He did not anticipate a change in the market status unless an unforeseen big event caused buyers to pull back.

What Advice Do You Have for Sellers?

Next, Adams asked each business owner to talk about the selling process and share any advice they would offer owners thinking about an exit strategy. Laura Hutchings, former CEO of Populus, began by sharing that what she thought would be a 2-3 month selling process ended up taking 6 months, which was still very fast and required a lot of focus. She had four words of wisdom to share with prospective sellers:

Lesson #1 – You need to take a lesson from Kenny Rogers and “know when to hold ‘em, and know when to walk away.” “Your greatest asset is the ability to walk away,” said Laura. “This puts you in a position of strength.”

Lesson #2 - You also need to know when to say yes. “Owners need to go into negotiations with a clear focus and know what winning looks like for them,” she said.

Lesson #3 – Understand that things will change. Owners need to realize that no one will ever run your company the same way you do. “I was ready for a change on a personal level, and that was very important. It helped me cope with the way the company changed after the acquisition,” shared Laura.

Lesson #4 – Don’t underestimate how much time it will take to close the transaction and have a very strong management team in place that can handle the day-to-day operations. “The worst thing that could happen is to miss financials, while you are focusing on a transaction.”

Greg Greenwood, Founder and CEO of Idella Wines, also shared his experience with selling his former distribution and manufacturing business. “We started thinking about selling in 2003, but didn’t sell until 2012. We sold 60% of the company, stayed on for 8 months, and then sold the remainder in a Two Bites of the Apple transaction. For us, the hardest part was looking in the rear view mirror and letting go,” said Greg. “Fortunately, we had done a lot of work with a life coach and knew what we wanted to do next.”

What Where the “Gotchas” in Your Due Diligence?

“We missed one thing in our asset purchase, which I actually didn’t find out about until years later, “said Greg. “My employment agreement included a 2-year non-compete, but the contract said 5 years.” Otherwise, shared Greg, he and his wife made sure everything was well documented, which was key. Laura agreed. “You need to have all your ducks in a row and always run your business like you are planning to sell it,” she said. “We spent many nights and holidays gathering documentation.”

Nate added that he has personally spent night in sellers’ attics looking through documents. “Knowing the details before you start the transaction process is very, very helpful.” Adams shared a key point regarding the importance of properly handling networking capital. “Lots of owners keep net working capital in the business,” he said. “But holding excess net working capital rather than just what you really need, can cause problems.” Laura said she would have handled net working capital differently. “Having money in the bank seemed like a good thing; but we should have run it leaner.”

Who do you let know you are doing an M&A transaction?

As a business owner, it can be hard to decide who to inform about a pending transaction. On one hand, you may need help from some of your team to gather the necessary documents. On the other hand, you don’t want to alarm employees unnecessarily. Adams shared, “We had one client who was keeping the transaction details confidential, but was making plans for the COO to run the business going forward. Unware of the plan, the COO resigned prior to the transaction because he thought the company was in flux and needed stability for his family. So, who did you tell about your transaction, and why?”

Greg answered first saying, “We knew we needed cash to meet our goals, so we told the entire management team we were going to see off some of the business, along with the timeframe and the intention. We avoid issues with employees by implementing an incentive plan that gave them all a piece of the pie.”

“I only told my husband (a partner) and the other partner who was our COO,” said Laura. “Then, about 2 to 3 month before the due diligence process started, we told the controller. That’s it. We knew that the team needed to focus on execution, plus there was a lot of uncertainty. We didn’t want to take the team through the ups and downs. It was emotionally taxing enough just for us.”

Next Adams asked Nate to share details on a deal that didn’t work out as planned. “We had a great opportunity in the healthcare industry,” said Nate. “Unfortunately, the accounting information was way, way off. When we received the adjust numbers, the expectations were so misaligned it could not be overcome.” Adams confirmed the importance of performing a Quality of Earnings Review as a first step in due diligence to see what earnings look like without anomalies. This helps avoid misunderstanding around the value of the business.

What other advisors were critical to the process?

Bar none you need experienced advisors was the panel consensus what asked what advisors were critical to the transaction process. “We brought in a law firm and investment banker,” said Laura. “You pay your advisors a lot for their advice, so you should take it. Attorneys are very risk adverse, but their advice was right on most of the time.”

Greg said he created a three-legged stool by hiring an accountant, lawyer and investment banks. He also had a couple of personal advisors, which we found very helpful. Adams suggested a fourth leg to the stool would be a wealth management advisor.

What top three pieces of advice would you give sellers?

In conclusion, Adams asked each panelist to give sellers three pieces of advice. “Be prepared,” Nate began. “Even in a perfect market you need to have expectations aligned.  Figure out what you want in a transaction so you can find the right fit. Second, if you are looking for a partner make sure to do your homework and get their references. Finally, be ready for a long process. It is a second job.”

“First, know what you want and write it down,” said Laura.  “Second, don’t be afraid to pay for good advice. It will pay for itself many times over. Make sure to get references and pick someone you can trust – someone you can have a beer. Finally, be emotionally ready to let go. You have to go with the flow and keep a sense of humor.”

Greg concluded the panel discussion saying, “Keep it light, but stay focused. Get very clear on why you are selling and what is going to come next. A life coach can really help you determine what you want to do next. Be intentional in your life and dream about what you want to accomplish after the sale.”

All three panelists and the moderator did a terrific job of providing relevant, educational and actionable advice for potential sellers.  For more information about preparing for an exit strategy, visit www.ForbesMA.com or call 1-303-770-6017.