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4 KEYS TO A
SUCCESSFUL
BUSINESS SALE
If you have attempted to sell a business in the past, or have conducted research into the
possibility, you have no doubt learned how complex it is to actually close a deal with an optimal
buyer with a deal structure that favors you.
To help guide business owners through the selling process, we’ve identified four key areas on
which you need to focus if you want to have a chance of closing a transaction beneficial for you.
1. Accuracy
The first key to a successful sale is accuracy. This need for precision is present in several
related issues:
Each of these is connected to the others, and all need to be managed carefully to have a
successful sale.
Most buyers will want to see not only historical numbers for 3-5 years that are accurate and in
accordance with the Generally Accepted Accounting Principles, also known as GAAP (your CPA
can help you with this), but they will also want to see 3-5 years of projections, starting with the
base year that is usually the fiscal year you are taking your company to market.
Although the historic data is important, what professional buyers are really interested in is your
future earnings potential, and this is where most business owners, turned into novice business
brokers, get themselves into trouble. They feel that in order to attract attention from buyers, they
need to create a future that is far too rosy, especially when compared to the company’s history.
Nothing could be further from the truth.
In fact, if you overstate your potential, it will actually turn off most buyers. For example, if your
historic 3-year to 5-year compound annual growth rate (CAGR – a calculation most business
calculators can make for you) has been running at 5% and in your forecast you are showing 30%,
buyers will be dubious.
So it is far better to create REALISTIC projections and avoid the hockey stick method of
forecasting. This is especially true for the base year. Again, the base year is typically the year you
are actively in the market trying to attract buyers.
Let’s say your company is on a calendar year end and you are in the market right now at the
mid-point of that calendar year; your base year would be that specific year and your estimate for
where the year will end needs to be spot on. For example, if a buyer were looking at your
company at the halfway point of the year, he would most likely want to see your first quarter
numbers, an estimate of your second quarter, and an explanation for why you are not at least at
50% for your estimated base year.
Certainly you can make the case that some industries are cyclical and a significant portion of
the revenue across the board is generated in the fourth quarter (quite a few retail industries fall
into this bucket). If this is the case with your industry, you will then need to show in your historic
documentation that you have annually generated X% in the latter half of the year. If you can’t
prove that, then you may need to revise your base year estimate.
No matter what, be ready to explain your base year in detail. This is the jumping-off point for the
entire forecast. And be honest. If your original base year estimate for your offering
memorandum is trending 10% below forecast, let the buyer know that. If you can explain why,
do so. There is NOTHING worse than a buyer sitting down with you in due diligence and getting
the surprise that your business is 25% off its base year. Avoid that – it can be a deal killer.
As with all your projections, make sure your base year is achievable.
Value Expectations
Lastly, but most importantly, the marketplace will ultimately tell you what your company is
worth; be sure to listen to it. According to surveys conducted in today’s market, the number
one deal killer from professional buyers’ perspectives is unrealistic value expectations on the
part of sellers.
However, if you are working without professional representation, then the only indications you
will get regarding the value of your company is from the market itself. Again, listen to what the
market is telling you.
If buyers are passing on your opportunity because they don’t trust your forecasts, they will tell
you. If you are getting offers below what you were expecting, ask them why. More often than not
the gap will be there because you have an expectation that does not meet the markets, usually
because you have more confidence in your future earnings potential than buyers do. Note: There
is an old axiom in dealmaking: He who mentions price first loses. Never state your value
expectations in any of the documentation you provide to buyers. Let them tell you what they
think the company is worth. This can be a challenge, but it is worth the effort.
So it all boils down to this: Be accurate when you forecast both your base year and your 5-year
projections. In fact, be conservative with both. If you fully expect to hit $3 million in your base
year, project $2.8 million in your documents so you can be ahead of your numbers in your base
year. Same with your 5-year pro forma: If you believe your company can grow at a 10% CAGR,
then project 8% and give the buyers confidence in your numbers. This will only help your
ultimate deal structure and valuation.
After operating in this industry for years and years, we have seen the same mistakes made over
and over by entrepreneurs. Lack of accuracy is one of the more common ones.
Knowing about buyers that are active in your space is important for several reasons. First, it gives
you a great idea of who to approach with your opportunity. Typically, if a company, equity firm,
or high-net-worth individual has already made an acquisition in your space, then they often are
looking for related deals to add on. If you can determine those that are acquiring, you will have
a great start on your buyer list.
Also, simply doing your research in this area can lead you to surprises. It is interesting how often
we present pitchbooks to potential clients that contain the names of active buyers that the
business owner was not aware were even in the market for companies. It is this list of active
acquirers that you want to locate for your opportunity as well. A pitchbook is a set of documents
that we create for certain companies that are in “hot” industries, locations, or size ranges. They
show recent transactions and equity firms with holdings.
The second reason that doing your homework on closed transactions is important is this: It will
give you an idea of how buyers are valuing companies in your space. Now I will admit that this
info is hard to find because it is not universally disclosed. However, if you do your homework, you
will most likely come across a transaction or two where the valuation metrics are discussed, and
this will help you determine how your company’s valuation might line up.
A great source (if you can afford it) is the Business Reference Guide (BRG) published annually by
the Business Brokerage Press. This booklet covers nearly every industry in the U.S. and some in
great detail. It provides an indication, with input from business brokers and mergers and
acquisitions (M&A) intermediaries, of how companies are USUALLY valued in a given industry.
I highlight the word “usually” above to make this point: Every company is unique, and buyers will
pay more (or less) depending on the quantity (and quality) of unique features the target has
that the buyer wants or needs. So any preceding transaction needs to be carefully researched to
determine the “why” of the transaction. I.e., Why did that particular buyer acquire company
ABC? What was the ultimate motive that lead him/her to value the business as they did? If you
can answer these questions, you will be well on your way to understanding your businesses
valuation metrics.
Armed with a good list of active buyers and the knowledge of how businesses are valued in your
niche, you are ready to hit the market with your company! I wish it was that easy. However, if you
do your homework as I have discussed here, you will be far better prepared to approach buyers
than you were before doing your legwork.
First, you have to realize that if you have family members working in the company, even if they
are not shareholders, they will be emotionally attached to the business. This attachment can
lead to friction post-sale as new ownership may not feel obligated to retain family members
after the deal closes. This is especially true if the family members are not playing a key role in
the operation of the business.
One way around this is to create employment contracts for these folks that stipulate a cash
payout if new ownership does not retain them. However, keep in mind that this may turn off
some buyers who may not want to retain or cash out family members.
Your Spouse
Another family member that is only too often relegated to the support role is the spouse. There
are two issues here.
Secondly, if you are able to successfully sell your company and cash out, most of the time that
means that you will suddenly be hanging around the house more than ever before. Throughout
the years we have seen this create tremendous friction, since most business owners have been
so busy working that they have not had the time to develop outside interests or hobbies. Quite
often we get calls from past clients who are interested in acquiring another company simply
because the spouse has asked them to get out of the house! So be sure to plan your retirement
in advance and have conversations with your spouse regarding your mutual plans post-sale.
Your Kids
Other people that may have an emotional interest in the business are your children. Too often
parental business owners do not include their kids in succession planning discussions until far
too late in the process. This can work both ways: Children working in the company who DON’T
want to inherit the company, and kids working in the business who DO want to run it. Both
situations are critical to consider.
What we see regularly is these conversations are put off because of family dynamics, and when
they are finally brought up, it is too late in the exit planning process to meet the needs of the
children. We recommend that you set aside time as a family BEFORE deciding which route to
take to discuss all of the issues involved. This is especially true if you have children who are active
in key roles in the business.
Never assume that your children want to inherit your position or make the mistake of
assuming you know that they don’t want the company either. Feelings can be hurt either way
and if your children are not prepared to take over your role, the future success of the company
can be impacted.
The bottom line is this: Any family-owned business is more than just an entity that exists to
generate income for the owner(s). If family members are involved, it is a part of the fabric of the
family, and the eventual transfer needs to be handled in an appropriate manner for all parties in
consideration of everyone’s emotional wellbeing. Keep in mind that family dynamics need to be
addressed far in advance of a business transfer – to not do so only opens you and your company
up to added aggravation.
As mentioned earlier, one of the most important issues buyers face is a seller’s value
expectations. What we are hearing from buyers is that far too many deals are not consummated
because sellers have value expectations that are not in line with the market. This is why you
need to have a professional firm do a thorough evaluation of your company. That way you are
aware of how much your company is worth BEFORE you decide to go to market.
Although as we mentioned in an earlier point, the market can tell you what your business is
worth, having a professional evaluation first will help you make some key decisions. For example,
if the value of your business today is below what you need (or want), then you must take steps
to enhance its value, or take a step back and consider why your value expectations are where
they are.
If you are basing your valuation needs on some arbitrary number (or are basing it on what you
think you might need post-sale rather than what you really will need), you need to meet with
your wealth manager and create a wealth needs analysis to mathematically determine your
true post-sale financial needs. You might be surprised to learn that the number you had in
mind is far higher than it needs to be.
But again, the way to start these conversations is to first know what your company is worth
today by having a professional value it.
A second important feature that a professional evaluation will provide you is the
impact of “recasting” on your historic financials.
Let’s be honest – for years your accountant has worked hard to minimize the impact of
taxes on the business. He or she has done so using legally approved methods; however,
if your financials are not recast, you could be presenting numbers to buyers that are
actually much lower than reality. A few of the items that should be considered in the
recasting process include:
These are just a few examples. As you can now see, if you have someone value your company
and they don’t recast your historic financials (usually three years will suffice), you could be
leaving a significant amount of money on the table when you sell. So be sure to hire an
experienced firm who can do this analysis and defend their conclusions.
Value-Enhancing Strategies
Another important outcome of a professional appraisal of your business is that, if done correctly,
you will come out of the process with a list of areas on which you need to focus in order to grow
your value either before you enter the market or even while you are in market.
Not every company is flawless and buyer ready today. This is especially true of smaller, privately
held companies. Now you may not want to admit that your business needs to focus on making
improvements, but it’s certainly something you need to know. This can be critical if you have the
value gap described above.
Keep in mind that buyers hate RISK. The more you can reduce the perception of risk associated
with your company, the better off you will be when negotiating with business buyers. Common
value-enhancing strategies include:
Again, this is just a short list of possible value-enhancing strategies. There are literally dozens of
other ideas that might apply to your business. The only way you will know what to do is to listen
to your professional advisors doing your evaluation and implement their ideas.
Finally, as part of the evaluation process, the analyst and team working on your project will
spend a good bit of time getting to know your company.
In many cases they may actually perform a SWOT analysis that reviews your business’ strengths,
weaknesses, opportunities, and threats. In others, a standard 15- to 20-page questionnaire may
be used to delve into all facets of your business.
No matter what method is used, the team getting to know you will be able to learn about areas
of your business that may not be possible to value in the traditional sense. These facets are
called intangible assets, and although they are not usually part of the valuation document, they
are a byproduct of the analysis. These intangible assets are usually the items that will help you
attract optimal buyers for your company once brought to light (and get you an optimal value).
Some valuation experts will argue that these items are already part of the valuation because
these features are what enable you to generate sales and profits and therefore are already
factored in. Dealmakers counter by saying yes, these areas are part of the revenue and profit
picture for the company, BUT they also can provide enhanced value above their relationship to
the financials for specific synergistic buyers.
No matter how you look at these items in relation to the numbers, a good evaluation team will
flesh out these areas as they learn about your company and will provide you with a list that you
can provide buyers.
Conclusion
Hopefully you have gleaned information that you can use as you begin to approach the market
with your company. Most of you are not experts in recasting, research, business valuation
methods, and accounting. These are just a sampling of the skills that a mergers and acquisitions
advisory firm will provide you.
Certainly you can sell a business alone; businesses are sold every day without the guidance of an
M&A firm. However, if you have read this, you have gained insight into how complicated the
process can be, especially if you want to do it right. Don’t decide to save a penny and end up
leaving millions at the negotiating table. Hire a professional to package your company and
negotiate with buyers on your behalf. It can make huge difference.
If you are interested in learning more about successful exit strategies, here are
additional resources to help you on your journey:
If you have any questions about anything we discussed, please call us at 972-232-1100.
Any conversations will be completely confidential.
Atlanta, Georgia
1175 Cicero Drive
Suite 1000
Alpharetta, GA 30022
Phone: 678-646-6704
Fax: 972-392-8581
www.generational.com