Selling a Business – Category Posts from The Forbes M+A Group. Research via our Knowledge Base and get access to M&A articles, news, and other info.

7 Things to Consider Before Selling Your Business

forum-logo-redSelling a business is rarely a straightforward endeavor. There are operational considerations, emotional considerations, and market considerations. Does your company have any red flags or risk factors? How can you increase valuation? What do you plan to do after sale?

We recently sat down with Adams Price and Bill Nack, managing directors at The Forbes M&A Group (an Axial member), to discuss tips for CEOs preparing for a liquidity event.

Make sure you have a good management team in place.
“The organization’s value should be in the organization itself — not the grey matter in the owner’s head,” says Price. “There’s a tendency for business owners to try to run every facet of their business. They may be very good at that, but there’s risk perceived on the part of the buyer if everything goes back to the owner. The value of the company becomes lower to compensate for that risk.”

“It takes time to develop a strong management team,” adds Nack. “We suggest to clients that they should be thinking about a divestiture years in advance. Unless you plan on owning your business until the day you die, you should always be thinking about your exit strategy.”

Engage an outside accounting firm.
“Make sure your financial processes and accounting methods are strong,” says Price. “One of the first questions we’ll ask a business owner is if their books are reviewed or audited by a reputable CPA firm. If a CEO says, ‘My cousin’s a CPA and he does my books,’ that can be a red flag.”

Before a buyer goes out to market, they should have a third-party firm do a quality of earnings review. “This allows us to discover anything someone else is going to discover in due diligence — so we can either fix it or message around it,” says Price. The quality of earnings report “basically tracks the cash going through the business, and verifies the consistency of those earnings.”

“The goal here is disclosure, disclosure, disclosure,” says Nack. “That way you can tackle these issues head on.”

Think about whether you want to leave.
Every CEO should think about what they’re trying to accomplish with a sale, says Price. “Where do they want to be in five years? What role do they want to have post-transaction? Are you looking to pull the ripcord and leave now? Or, are you looking for a partner to realize further financial or operational goals?”

The answers to these questions, says Price, have “a big bearing on how you position the company to the marketplace.”

Often, CEOs will still be weighing their options when they first meet with an advisor. “It’s incumbent upon us to help them understand the consequences of both options,” says Nack. Private equity firms will typically require a management team to stay on board; if the management team wants to leave, then it’s time to focus on strategic buyers. “A strategic buyer will likely tolerate a weaker or more uncertain management team, because they’ll have the ability to insert their own people.”

Don’t believe everything you hear at cocktail parties.
“CEOs may hear multiples at parties or trade shows — that someone got 8x or 10x or 12x EBITDA for their business — and think that that’s what their business is worth too,” says Price. “But you always hear about businesses that sell for a ton, and rarely hear about those that sell for the market average.”

A company’s management team, earnings, and strategic plans all help establish the value of a business. “We figure out what value range a business owner can expect at a specific time in the market, then help them understand how to maximize their company’s value within that range. We bring specific buyers to the table in a competitive format so that they’re trending toward the higher end of the range,” Price says.

Take external factors into account.
“Every business is different,” says Nack. “Every business is going to have different sensitivities based on the macro marketplace as well as its current management situation. For example, we’re seeing really fantastic multiples for infrastructure companies and tech and SaaS companies. There are great multiples in particular for ‘Internet of Things’ companies. On the other hand, if you’re an oilfield services company, right now is not the time to sell. It’s not only not the time to sell from a valuation perspective, but there are no buyers out there. Few are acquisitive in that space.”

Nack also added, “On the macroeconomic side, interest rates are low, so buyers can take more debt on a business — and therefore valuations are up. So now is a great time to sell for many business owners because of all the money that’s currently in the marketplace.”

A good M&A advisor will tell you if it’s not the best time to sell. “We have no problem telling someone that they’re not going to successful going to market right now, whether as a result of external or internal factors,” says Price.

Don’t inoculate the market.
“Sometimes, sellers decide to go out and play in the market a bit,” Price says. “They’ll talk to a few people, but the conversations will end, whether because of lack of sophistication of process, or disconnect on valuation. When a buyer walks away from a deal like that, it can be very hard to get them to re-engage.”

“Once, we were going out to market on behalf of someone, and we went to a private equity group. The PE group said, we’ve talked to that guy three times — we’re not talking to him again. The seller inoculated the market in that case. He spoiled it before we could take his business out in a more sophisticated way.”

Realize that the process will take time.
“It can take 8-12 months to find the right buyer for a business, and get the deal done in a manner that’s beneficial to both parties,” says Price. “It’s an intricate process.”

“Some CEOs come in and want to sell their company in a month and a half, and we have to disabuse them of that notion. It’s important for them to understand that this is a process in its own right. This may be a second job of sorts for a little while, which can be nerve-wracking. We help take a lot of that load off them, but they’re still highly involved in the process.”

An advisor will help make sure the owner “doesn’t waste time” in the sale process, says Nack. “We have a process to sift through potential opportunities, and only bring buyers into the discussion where there’s a high potential of something happening.” Advisors coordinate conversations in such a way that “someone can submit an Indication of Interest (IOI) without having to have an in-depth conversation with the seller. We make sure a buyer is serious and capable of doing the transaction first — which is often the opposite of how it works when a seller tries to sell their company without representation.”

By Meghan Daniels, Axial

What Are Buyers Looking For In a Company?

what buyers looking forIt has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.

Quality of the Earnings

Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be:

  • meeting some new governmental guidelines,
  • paying for a major lawsuit, or
  • adding a new roof on the factory.

The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.

Sustainability of Earnings

The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract, etc. Will the business continue to grow at the same rate it has in the past?

Verification of Information

Is the information provided by the selling company accurate, timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables? The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: mconnors via morgueFile

Looking Ahead to 2015

Where will buyers come from in the next 6 to 12 months? What types of companies will be hot in 2015 and what attributes will make them most attractive? Is the end of the seller-driven market in sight?

These questions and more were answered during a recent event featuring a panel of professional advisors who shared their experiences helping buyers and sellers prepare for and execute successful company transactions. As more sellers are expected to enter the market in the next 12 months, analysts are anticipating a shift in supply and demand for certain industries. Combined with changing economic conditions and possible rising interest rates, executives looking to sell in 2015 must be well prepared in order to achieve their financial objectives. At this free breakfast seminar titled “Looking Ahead to 2015,” attendees learned, among other things, the due diligence processes of buyers, pitfalls to avoid, current M&A trends and essential steps to take prior to the end of 2014.

Trends in Deal Structures

Adams Price, Managing Director of Forbes M&A and panel moderator, began the program by asking about the latest trends in deal structure. Todd Criger, Associate with Holland & Hart, shared three business transaction trends. First, he said that typically 5-10% of the purchase price is being held in escrow. He’s also seeing companies hold 10-20% of the purchase price for one audit cycle for indemnification. Finally, Mr. Criger discussed the growing popularity of parties bridging the purchase price through earn-outs. “Although there are lots of challenges to earn out structures, they are much more prevalent now,” said Criger.

The Importance of Preparation

Bob Tinglestad, an experienced IT professional and entrepreneur, shared details of his recent experience selling his IT consulting organization to EKS&H. His transaction process began years ago when he began working with a business coach. From there, he established core company values, a mission statement and made sure he had strong processes in place. This was critical to his successful deal, which only took five months from the start of discussions to transaction close. When asked what he wished he’d known prior to the process, Mr. Tinglestad pointed to the importance of finance knowledge. “I wished I had known more about core finance capabilities and forecasting,” he said. “I had to learn a lot about business valuations in just five months.”

Francis Brown, Wealth Specialist with Key Bank, also emphasized the importance of planning ahead and using qualified, trusted advisors. “One business owner I worked with decided to hire a friend as his attorney to save money,” said Brown. “Unfortunately, he ended up not having a proper tax plan in place and failed to maximize what he took home on the back end.”

Mr. Criger concurred with both other panelists, adding that the due diligence process will uncover any issues, so have messaging prepared ahead of time to explain anything upfront will increase the likelihood of a successful transaction. “If there are any issues, work with an advisor to communicate it upfront,” said Criger. “Transactions are adversarial by nature, but buyers want to get the deal done. You don’t want to lose trust by not being honest.”

When asked what he did to prepare his team for the acquisition, Mr. Tinglestad explained that finding a buyer with a similar culture and values were top priority for him. He knew that if his people weren’t happy, it wouldn’t work. However, he did not talk about the acquisition process with his team because he didn’t want it to be a distraction. A week before the transaction closed, he held a 3-day long meeting to share the news and answer questions. This time spent with employees paid off, as 100% of the staff are still with the company post-acquisition.

Mr. Price also asked the panelists to share what surprised them most during the transaction process. Mr. Tinglestad shared how he was shocked at the amount of due diligence that was involved. Had he know this ahead of time, he would have had better worded contracts and been more organized with paperwork. “I couldn’t ask my staff to help gather the necessary documentation,” said Tinglestad. “It puts a lot of pressure on owners in addition to running the business.” Fortunately he had decided early on to seek help from M&A advisors and a legal firm, which he said made the process much smoother.

Mr. Brown shared with the audience three criteria business owners must have before moving forward with an exit strategy. First, the business has to be ready. Second, the capital markets must be right. And third, the business owner must be mentally ready to sell and “be willing to give up your baby.” So much time is spent on the pre-transaction planning, that owners often neglect to consider their wealth accumulation objectives until it is too late. For example, is a seller comfortable with annuity payments rather than a lump sum?

Valuation Trends

When asked what trends they were seeing in business valuations, the panelists agreed multiples were rising. “10-12 times EBITDA is common now, but I’ve seen higher in the market” said Criger. However, all panelists cautioned to not focus too much on multiples as it can be a misleading way to value a company. “Owners have little control over multiples because they are driven by the market,” said Price.
Companies will be more valuable if they are matched to the right buyer. For example, Mr. Brown advised owners to ask themselves, “Do you want to stay involved?” If so, then a private equity firm might be the best fit. Another key question is, “Can your business run without you?” If yes, then your business might be worth more to a different type of buyer. If it can’t, then you may look for a buyer that wants to invest in a management team and is dedicated to growth.

Many different buying scenarios were discussed during the question and answer period. Audience engagement confirmed that all three panelists did a terrific job of providing relevant, educational and actionable advice for potential sell and buyers. For more information about preparing for an exit strategy, visit www.ForbesMA.com or call 1-303-770-6017.