The Denver Post | BUSINESS
by GARY MILLER | email@example.com | GEM Strategy Management, Inc.
Many small-business owners have worked years building successful companies. Their careers peak when they sell their companies and realize the fruits of their success. But, for most owners, selling their companies is, at the very least, an emotional event. Worse yet, most owners have never bought or sold a company. Therefore, selling your company can be daunting. So where do you begin?
During 2020 through the first half of 2021 looks very good for owners to cash out by selling their companies. There are many buyers with adequate capital, or resources to capital, who will pay high premiums for well-run businesses. However, to achieve these high valuations, sellers must follow a disciplined approach throughout the transaction process – pre-market preparation; go-to-market execution; and careful management of the transaction process.
Preparing your company for sale
Research indicates that business owners who carefully prepare their companies for sale before going to market create higher enterprise values, higher selling prices, and better terms and conditions than owners who don’t adequately prepare. The better prepared you are, the better position you will be in to evaluate future offers. Therefore, most business owners engage M&A advisers to help guide them through the preparation and transaction process.
For example, advisers will help you get your financial house in order. Advisers may recommend that you have your financials reviewed by an independent CPA firm apart from your bookkeeper and tax preparer. Also, they will help you obtain an outside, independent valuation of your company. Expert advisors will assess whether or not you have a strong strategic business plan. They will examine your financial proforma to determine how realistic they are and prepare you for the buyer’s due diligence process. They will guide you to transaction law firms. And, they will help you consider tax-efficient wealth management alternatives and diversified estate plan strategies.
Part of the preparation is examining your exit strategies. For example:
- Do you want to stay on after the business is sold?
- Do you want cash only, or cash and stock?
- Do you want to roll-over a portion of your equity into the buyer’s business?
- Do you want to establish a family office, trust or foundation after you sell your company?
- Do you have future plans for your life after the deal is completed.
Answers to these questions will often affect the deal structure when selling your business.
Understanding the buyer universe and environment
Assuming that you do not have children, relatives, or others who want to buy your business, you will want to understand the outside buyer universe and environment and think through potential targets to acquire your business. Some examples include:
- Strategic buyers, including competitors, looking to expand in your geography or industry. Strategic buyers typically pay higher premiums, but, look for strong synergies for cost savings through the integration process post-closing.
- Companies who look to vertically integrate up and down the “supply chain”; or portfolio companies looking for “bolt on” acquisitions to expand their portfolio of similar companies.
- Financial buyers who look for consistent revenue streams and profits for their investors. Examples include pension funds, foundations, and family offices. Most often owners would be required to stay on to run their successful businesses after the acquisition to continue to producing strong earnings and grow revenues.
- Private equity or venture capital firms constantly look for companies with strong growth histories and future growth potential, deep management bench strength, excellent return profiles and consistent operating excellence. These buyers look to exit within five to seven years post acquisition.
Managing the transaction process
- Find a “deal team” of trusted advisers, compatible to work with, and are aligned with your exit goals. They normally include an M&A consultant to help prepare you to go to market and manage the transaction process. They help you select other advisors needed in the transaction process to work on legal, tax, accounting, and estate planning.
- Tell your senior management, on a need-to-know basis, about your exit plans. Develop a retention agreement that includes bonuses for each of them in order that they remain with the company until the sale closes. More often than not, the buyer will closely examine whether or not to rehire your management team.
- Develop a strong story line that is a compelling to potential buyers. It should include earning history, growth potential, management strength, operation efficiency and realistic, but aggressive, proformas that will withstand the buyer’s rigorous analyses.
- Identify the price that you want to sell the company. Look hard at your independent valuation and its comparisons to other companies sold within the last two years. Determine your “walk-away” number before you go to market so that you will have significantly lowered the emotional impact of price negotiations. Remember that the selling price is not your only consideration. All dollars are not equal. Deal structures can vary significantly affecting the total value of the deal.
- Examine the Terms and Conditions of the Agreement. Often, they are as important as the selling price. Therefore, consider the “whole deal” and its total value, not just a few of its components. Often, deal terms and conditions include non-compete provisions, management continuity, customer retention, and representations and warranties. These components vary greatly from deal to deal. Seek expert legal advice before agreeing to any deal terms and conditions.
- Limit the time-line of the “No-Shop” provision, often found in the Letter of Intent which precedes the Purchase and Sale Agreement. It forbids you from entertaining, or seeking, other potential buyers. The no-shop provision can span a period of time (usually during the buyer’s due diligence period) that could cause other potential buyers to lose interest. Therefore, limit the due diligence time period and established a concrete closing date.
- Vet the potential buyer regarding its reputation within the industry, financial capacity to purchase your company and will the buyer close the deal.
Do’s and Don’ts
- Don’t get so involved with the transaction process that you neglect the day-to-day operations during the transaction process. Since it takes from eight to 24 months to sell a company, losing revenues and/or profits can affect the total value of the company’s purchase price. Stay focused on running your business and let your trusted advisers handle the transaction process.
- Do take a proactive approach in all final decisions during the transaction process. Take time to review your original exit plans and determine if the sale of your business meets your exit plan goals. If the sell price, terms and conditions, representations and warranties are aligned with your exit plan goals, then close the deal.
With a thorough and disciplined process, you will be likely to sell your company and start your new life with new goals, challenges, and opportunities. Plan to enjoy the wealth you’ve created over a lifetime of hard work.
Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small- and medium-sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach him at 303.409.7740 or firstname.lastname@example.org.