Find a guide to help navigate one of your most challenging, yet important, decisions
Many business owners share a common approach to thinking about when and how to sell their companies: they don’t.
Sadly, such lack of planning erodes value that these owners have worked so hard to create. Ask most owners some questions about their fixed assets – what their machines are worth, how much comparable pieces are fetching at auction, when they expect to replace key units – and you’ll hear well-articulated answers.
But questions asked about their company’s future frequently leave business owners bewildered. What compels these folks to develop such a nuanced understanding of their equipment while neglecting the far greater value that exists in their companies?
In our experience as mergers and acquisitions (M&A) advisers, many owners don’t know where to begin with transaction-related issues. So instead, they ignore them.
This is both a poor approach and a missed opportunity.
Developing a basic understanding of M&A helps owners dramatically improve their outcomes when they inevitably undertake a transaction in the future. With respect to planning a major transaction, business owners should consider three factors: market conditions, company readiness, and shareholder preferences.
The M&A market is dynamic; buyer enthusiasm for acquiring companies fluctuates over time.
The outcome of a transaction will be influenced in part by the environment in which the business is sold. Understanding this environment begins with assessing the economywide catalysts for deal activity. How do current valuation levels compare with historical averages? Is financing available for M&A on attractive terms? Are CEOs confident in the outlook for their businesses?
These questions provide a backdrop for sector-specific M&A activity.
Consider, for example, an industry undergoing consolidation. An informed business owner should understand why deals are happening in their industry. Perhaps companies are motivated by acquiring new capabilities and becoming single-source suppliers for their customers. Alternatively, buyers could be pursuing scale as a means of gaining a competitive edge. Either way, identifying the correct drivers for M&A is a vital step in establishing how well your company is positioned within its industry.
Painful and unnecessary value destruction typically occurs in transactions when the seller’s business is inadequately prepared.
Most initiatives to improve a company’s market readiness fall into two broad categories. The first of these is housekeeping. For a deal process to be well-executed, a company’s internal records should be able to withstand the scrutiny of a buyer’s due diligence. Too often substandard recordkeeping results in contentious issues arising mid-transaction. Buyers may attempt to use these issues to extract concessions or abandon the deal entirely.
The second category is operations. Owner-operated businesses frequently rely on the owner’s involvement in the company. From a buyer’s perspective, the easier it is to replace the owner, the more attractive the company will be.
Operational improvements also include executing on any “low-hanging fruit” initiatives to grow earnings. We frequently hear business owners say, “A buyer would only have to do X, Y, and Z, and the company would be far more profitable.” If the seller wishes to be paid for “X, Y, and Z,” they should make those changes before starting a sale process.
On their own, a strong M&A market and a well-prepared company are insufficient to consummate a successful deal.
Shareholders must commit to the transaction and enter the process with clear, established objectives. Setting these goals requires personal reflection from ownership. In addition to financial targets, owners should consider how much longer they want to work in the company and whether they would rather pursue other interests. Owners should also reflect on their risk tolerance concerning the value that exists today in their business.
Some may aspire to grow their company and achieve a higher valuation. Others will prefer to lock in the wealth they’ve created in their business.
Regardless, shareholder preferences should always play a central role in determining the “right” time for a sale of a private company.
A sale does not need to end an owner’s involvement in the business, though. Many buyers see value in the outgoing owner’s relationships and expertise and will offer incentives for them to stay with the company in some capacity. Such structures can be particularly compelling if an owner seeks near-term liquidity or risk reduction, but also has a significant project they would like to see through to completion.
Business owners do not need to become experts in all aspects of dealmaking. They should, however, equip themselves to protect their company’s value.
At minimum, owners should understand when to consult with outside professionals who possess specialized M&A expertise. Whether you intend to sell your company next year or next decade, receiving current and ongoing guidance on the market, company, and shareholder factors will help you secure an exit that rewards you fairly for your efforts in the business.