This is summarized from David King’s “Selling Your Business” podcast featuring Lamar Rutherford from Excellens Solutions. When should a company start preparing for a sale? Ideally, if we can start to get your business prepared one to two years before you want to exit, that would be ideal.
One to two years gives time to set up some tax strategies. It gives time to really make some changes to systems and processes. And maybe some personnel changes need to be addressed.
One of the things we talk about with a business sale is that an owner wants to reduce the risk on the transition. So how can we reduce that risk for the owner? Having growth strategies is part of it -- having a management structure in place so that when the owner leaves, the new owner isn't high and dry.
What’s the first step an M&A advisor will typically take? One of the things a smart M&A advisor will want to tackle is cleaning up your books. We want to start by looking at that picture. One of my favorite phrases is, ‘Your books tell a story, let's make sure it's a best seller.’
With my CPA and business background, I look at your books to see what's been going on. When and how are things like deposits recognized, what types of costs go into Inventory, how old are accounts receivable?
Then I look at the problems that might show up from a buyer’s perspective . . . · Are there problems with customer concentration? · Are there problems with the owner being too critical to the business? One of the things we say is ‘If you can take a vacation for a month or three months, and the place doesn't fall apart, that's great.’ · There may be product optimization issues. The owner might want to represent that the company has growth opportunities, but they haven’t necessarily pursued them.
We have one owner that has a capacity issue. He's bumping up against his manufacturing facility. I have an expert that is helping him evaluate the buy versus lease equation and look for that new location.
One of the first steps we take is to do a valuation. We call it a BOV - broker's opinion of value. It’s not a formal appraisal, we don't go to court to defend it, like you would need for a divorce or tax purposes. But if you just want to know what your business is worth in the market, that's our first step.
We might point out a few things that you can do to increase your value. I call that kind of a gap analysis.
You’ll see the multiples that are typical in your industry. But one of the factors is that if you grow your business, the multiple often gets higher. So, if you increase the size of your business and show that growth potential, you can increase your multiple.
If your business has been stable, the value will be based just on that multiple.
But if you have growth potential or are showing growth trends, that adds to value.
Creating the growth story It’s true that no buyer wants to buy a sinking ship. If there are any trends that show the company moving in a negative direction, that can be a problem.
One of the things we work with sellers on is how do you create that story -- that your company has growth potential. I say, every business owner can’t get to everything. There's always something you're not getting to. Start to write those things down. They can be presented as opportunities of where you could have grown the business (if you had the time, the energy, the resources, etc.)
I always believe in keeping the transaction confidential until the very end, because you just never know if the sale will close until it actually happens.
We had one transaction where an hour before the money was transferred from the bank, the buyer got slapped with a lawsuit and his funds were frozen. So, you never know what might happen. That transaction ended up going through in the long run, but twists and turns in the sale can surprise people.
I mean things like 9/11 or COVID change everything. Sometimes things happen that are just out of your control.
I have a transaction now that is closing hopefully in 60 days, but it's dependent on the real estate selling, and so I'm hoping that real estate market stays strong.
The owner is going to get $69 million for his real estate and another amount for his business. So, we’re hoping the market doesn't change in 60 days.
How should you advise the employees of the sale? I think it’s important to tailor your approach to the situation. My general advice is to keep the sale as confidential for as long as possible. And generally, that benefits the buyer as well as the seller, because you don't want to lose key people and you don't want to lose customers.
But I can't judge your relationship with your people. So, your decision about who knows and who doesn't know is really up to you as the owner.
My general advice is don't tell them if you don't feel compelled to do so. And the reason is you can go through a lot of ups and downs related to evaluating the transaction, trying to decide if you want to go through with it or not. And then the sale might fall through due to factors completely out of your control. So, that can create a lot of stress for everyone.
People aren't usually that comfortable with change. And so, if they start thinking about having a new owner and then they don't, it's almost worse.
The other thing is that many times, a buyer wants to meet key personnel. We'll try and minimize that and keep that to the very end, to make sure that everything else is going forward before we do those interviews. Or if there are ways around it, we try and get creative.
For example, a buyer may want to talk to a key customer. So, we've had situations where we’ve had the buyer on the phone with the customer, but we presented it as “we have someone in training, listening in,” but the buyer doesn’t participate in the conversation.
The buyer can hear the conversation between the seller and the customer. The buyer gets confidence in the customer relationship that way without having to meet the customer. So, we try to think of creative ideas on how to keep it confidential, but still get both parties comfortable so we can get the deal done.
If you are preparing your business for a sale and would like to learn more, view the entire podcast at: https://youtu.be/HlpO3qS0opc
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