When is the Best Time to Sell my Business?

This will be one of the most difficult questions for business owners to answer.  Since your business is most likely your largest asset it will most likely be the largest transaction you will ever execute.  There are many questions you will need to answer to be comfortable that now is the time.

Has the company outgrown your skill set?  Can you take the company to the next level without incurring massive amounts of debt?  Maybe you don’t want to incur more debt.  Have you gotten to the point where you just don’t want to work 120 hours a week and have all the pressure associated with owning your own business?  Remember the two great American dreams are to own your house and your own business; but in both instances there is a time to downsize. Just a few more questions and then some answers.  Is my business ready to sell? Can I cope with the economic and industry changes on the horizons? Do I sell the company myself or hire an advisor to represent my company? Should I sell the company or leave it to my children?

Determining the best time to sell is the result of a combination of factors.  When you are ready to sell will the market be ready?  The two most important factors in going to market: 1) are you ready to sell and 2) is the market timing good.  You should know your business better than anyone, you know your customers, you know your employees and you know the competition.  You are the best person to know if you and your business are ready.  Market timing is a tricky question.  We are not advocates of trying to time the market.  We believe that determining when you are ready is more important than trying to time the market.  Then it is our job to maximize value through our proprietary sale process given the market conditions at that time.

Having said that, as we write this article we believe the M&A market is very positive.  Although interest rates are on the rise, capital is still relatively cheap.  Corporate coffers are flush with cash reserves and financial buyers (Private Equity Funds) are under pressure to put pledged capital to work.  As a result, buyers are able (and willing) to pay higher multiples in today’s market.  

We said earlier that you know best whether your business is ready to go to market.  The most important factor in how attractive your business will be in the market is your historical trend.  Buyers prefer consistent, steady growth over volatility and more than one tremendously good year.  I will go so far to say that buyers are suspicious of the sustainability of one tremendously good year.  If your trends are positive and your last 3 to 4 years show stable consistent growth, then we would agree, your timing is good.

Should I sell it myself or hire a professional investment banker?  Since we are in the business of selling business we would obviously say hire us to sell it.  Having said that, it is important to recognize how hard it is to run a Sale Process in a confidential manner and continue to run the business.  We add substantial value to the sale process by:

• performing pre-marketing due-diligence to uncover positive business attributes to be highlighted and negative attributes that we might be able to fix before going to market;
• preparing a comprehensive marketing document known as a Confidential Business Memorandum;
• researching and assembling a target list of the most likely buyers for your business.  Identifying the most likely buyers is critical in order to maximize value;
• controlling the flow of information so we can bring multiple buyers to the table at the same time and create a private auction to drive offers higher.
• provide guidance on evaluating and selecting the best offer based on both price and structure, relying on our combined decades of experience completing business sale transactions.
• free you up to continue to run your business and not be distracted by the sale process.  During the sale process is the time to make sure your business is operating at its peak.

These skills and several other factors will allow a professional advisor to get you the best price for your business regardless of market conditions.  We bring our entire team to bear on each and every transaction, including other professional such as the attorney, accountant and frequently an estate planning professional.  It is this team approach that assures that we will close the deal. This is a process that could take 9 to 15 months, or more.  During this time, you need to be running and growing your business.  The most valuable use of your time and skills during this process is to grow the business. 

Should I leave it to family?  That certainly is an option.  As I am sure you know, it depends on the capability and the passion the next generation has for running the business.  Many times, the next generation will be much better off with a liquidity event so they can pursue their own passions.  You should also consider a sale to a financial buyer to provide a liquidity event for the current generation and still allow the next generation to continue to run the company and retain some ownership.  We have completed several transactions like this and consider it a win/win for both generations.

Bill Neely, Senior Partner

Alan D. Austin, CFA

How to Position a Company for Sale

As with many questions, the answer to this question is not earth-shattering but implementing the answer in an effective manner can be a challenge.  The answer is to position your company in the best light; present it to the most likely buyers who will see the most value and create a sense of urgency.

Position your company in the best light.  The first thing you should acknowledge when selling a business is that there are no secrets.  Once a letter of intent is accepted by the seller, the buyer will have the opportunity to conduct extensive due-diligence on your business.  Most business owners do not appreciate how detailed, expansive and intrusive this due-diligence process can be.  The seller should also expect that any deficiency in their business, whether they know about it or not, will most likely be uncovered during due-diligence.  So, it is best to acknowledge these deficiencies upfront; fix them if you can and deal with them openly if you can’t fix them.

Selling a business is nothing like selling a house but sometimes a familiar analogy is instructive.  When selling your home, it is normal to clean it from top to bottom, keep it tidy throughout the sale process, take care of any deferred maintenance, spruce up the landscaping, etc.  It is the same with a business.  Clean up the facilities, take care of any deferred maintenance, update your procedure manuals, have job descriptions for key positions, make sure all your business and financial records are accurate and up today.  The list of things to do is extensive and will be the topic of a separate post.

Once you have done what you can internally to address any concerns a prospective buyer may have, your investment banker (M&A Advisor) will prepare a comprehensive offering memorandum.  This is primarily a marketing document but it is also an opportunity for you and your advisor to disclose and address items before they become an issue.  For example, if you have one customer that is 20% of revenue, normally a big negative for most buyers, this must be disclosed.  At the same time, this can be addressed by disclosing that the risk of the loss of this customer is minimal due to a long term “take or pay” agreement with them, if that is the case. 

Positioning your company in the best light is the job of the offering memorandum.  This document must be comprehensive and accurate.  At the same time, it should accentuate the positive attributes of your business while simultaneously mitigating the areas of concern, if possible.  This document is critical to implementing an effective marketing campaign.  Your advisor must be skilled at creating a compelling memorandum in order to effectively position your company for sale.

After preparing your business and the offering memorandum the next step is making sure the opportunity is presented to the most likely buyers.  If the seller's goal is to maximize value then presenting the opportunity to both strategic and financial buyers is critical.  If selling a majority stake so the owner can “take some chips off the table” but continue to own a minority position and continue to run the business, then the target audience would be limited to financial buyers, i.e., private equity funds.  Having an advisor that has the research capabilities to identify active strategic buyers in your industry and that has relationships with an extensive group of private equity funds is critical.  You also need an advisor who is committed to reaching out to these potential buyers to raise the profile of your offering.  There are many competing opportunities out there for these potential buyers and it is your advisor's job to raise the profile of your offering above the rest.

The last step in the process is to create a sense of urgency.  This starts with a coordinated process of presenting your company to all the likely buyers at the same time and then quickly following up with these potential buyers to determine who is interested and who is not.  This coordinated distribution of the memorandum allows you and your advisor the ability to set a limited time for evaluation by these potential buyers and the ability to set a deadline for the submission of offers.  By controlling the deadline for offers, your advisor has created a sense of urgency and an auction process where one offer can be compared against another.  This process will frequently lead to a second round of bidding among the top offers.  Once the best offer is accepted, buyer due-diligence begins and you are moving toward a closing.

In order to have an effective transaction, it is critical to position your company in its best light with a professional offering memorandum; present your company to the most likely set of buyers and create a sense of urgency and an auction process.  Engage an experienced M&A advisor to assist you in positioning your company for the best possible sale.

Alan D. Austin, CFA

3 Reasons an M&A Advisor is Worth Their Fee

I have to believe that every business owner that is considering the sale of their business goes through the exercise of deciding whether to use an M&A Advisor or trying to sell their business themselves.  I understand the apprehension that comes with hiring an M&A Advisor.  On the front-end, the Advisor's fee looks daunting; so the real question is whether their services added value.  I am in the business so naturally I am convinced we add value in the form of higher valuations and more efficient transactions.  But you don’t have to take my word for it.  Go to this Axial Network article that presents a recent survey of CEOs who had recently sold their business and reported that 100% of the respondents said their M&A Advisor added value. 

3 Reasons an M&A Advisor is Worth the Cost

The article goes on to discuss three specific ways an M&A Advisor adds value and also highlights the benefits of early preparation when considering a sale. This article is a good start on the value provided by an experienced M&A Advisor but it is certainly not exhaustive.  We will explore more of the areas where we add value in the sale process in future articles.

Alan D. Austin, CFA