January 28, 2013
A Few Things to Consider Before Selling Your Company
For most entrepreneurs and owners of privately held businesses, selling their business is one of the most important and difficult decisions they will ever make. It would be logical to assume that business owners would take a very deliberate and methodical approach when preparing to sell their business. Unfortunately, for most the decision to sell is more often reactive (e.g. unsolicited interest, health reasons, need for liquidity, etc.). Regardless of what is driving the decision the old adage always applies, better prepared than sorry. Accordingly, we came up with a few questions and/or issues we believe are worth addressing or at very least thinking about before you jump headlong into an M&A process. If you can address all of these you certainly will increase your chance of success.
1) How do you differentiate yourself [from your competition]? – Although an obvious question, it is surprising how many business owners struggle to deliver an impactful answer. Selling a business is an interactive process. Buyers pose lots of question – How do you win business (e.g., price, quality, service, other)?; Why do you lose business?; How is your business trending? Why?; How do you grow your business?; Who do you compete with?; and What keeps you up at night? are just a few examples. In order to maximize value in a transaction, you must have an articulable story. Buyers need to be persuaded. They need to know why someone should want to buy your business. In today’s market, it is not enough to offer high quality products and services. Truly understanding how and why your business is better than the competition is essential to success. Differentiation can take many forms. It can be first mover advantage, proprietary technology and/or processes, intellectual property, brand, etc. The ability to craft and deliver a coherent message as to what sets your business apart not only helps to win business but will go a long way to stir investor interest. More importantly, the inability to articulate a compelling and persuasive story can be the difference between success and failure. If you don’t already have something that sets you apart from your competition, you need to establish one or more points of differentiation.
2) How Strong is Your Bench? – A common trait of virtually any founder- or family-owned business is that the owners are deeply ingrained in every facet of the business. The expression, “chief cook and bottle washer” is not far from the truth in many closely-held organizations. Although this can be effective for some, for many businesses this approach is not sustainable. And in almost all cases it can detract from value when you are looking to exit. Building a strong bench of managers who are contributing to the strategic direction of the firm and can articulate the Company’s story can be invaluable when selling your company. After all, a strong management team is the backbone of any successful company. This is particularly true for service-oriented businesses whose greatest asset is intellectual capital that leaves the building each evening. This point is not lost on buyers, strategic or financial, whose value will typically reflect the quality of management that is coming with the business. Before transacting, buyers will want to have met your key management, assess their abilities, identify gaps in skill sets, and understand who owns key client and supplier relationships. Thus, the ability to identify key management personnel that oversee critical business functions and relationships far outweigh the cost of compensating them and aligning their incentives with yours.
3) How Reliable Are Your Financials? – Although audited financials are not essential to sell your business, having an independent third-party provide some level of review can significantly increase the certainty of transacting on the terms negotiated. In every deal, the buyer conducts rigorous financial diligence. In most cases, this means some form of quality of earnings assessment. To the uninitiated, a quality of earnings assessment is a study of the accounting procedures used in compiling a company’s financial statements. It is used to measure the quality and sustainability of a companies reported earnings and/or cash flows. By engaging an audit firm in advance of a sales process, you can mitigate the risk of any unforeseen accounting irregularities that lend themselves to renegotiating the deal and provide investors/buyers with a higher degree of confidence in Company management. After all, financial statements not only provide investors a reasonable assurance of a Company’s operating performance, but are also a reflection of the decisions and manner in which management runs this business.
4) What are Your Priorities/Objectives? –It is important for founders/owners to understand what aspects of a sale are important to them, beyond price that is. As a founder, the questions you should be asking yourself in preparing to sell your business include: How much liquidity do I need/want to achieve my personal objectives?; What type of role do I want to have post-transaction, if any?; How transferable is my business?; Would I consider selling a portion of the business? Answers to these questions and others will help to develop a roadmap that can then be used to construct a process that will maximize value and increase certainty of close while taking into account your objectives. Ultimately, a transaction can be structured to meet almost any objective. It is not uncommon for owners to cash out completely and exit immediately upon consummation of a transaction. Conversely, we have advised on transactions in which founders achieve significant financial diversification, while retaining majority ownership (>50%) and operational control of the post-transaction business. Fully vetting and prioritizing your objectives increases the likelihood of achieving the desired result. It will also allow you to optimize the process of selling your business by focusing on the right group of buyers (e.g. strategic, financial or both) and getting your ducks in a row before launching.
Although the questions outlined above may seem obvious, it is not uncommon for closely held businesses large and small to grapple with many if not all of these issues and often after it is too late. Our best advice is to engage in discussions with transaction professionals, financial, legal and wealth management well in advance of selling your business in order to identify any issues and develop a strategy to mitigate as many risks as possible.