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Key Advisors Shared Advice with Business Owners on Factors to Consider When Selling a Business during Recent M&A Seminar
With record amounts of private equity funds, interest rates at all-time lows, and cash-flush Fortune 500 companies, the M&A industry continues to see historically high multiples across most industries. But will it last? This was the topic of a recent panel presentation sponsored by The Forbes M+A Group, EKS&H, Guaranty Bank and Kendall, Koenig & Oelsner PC.
During the invite-only breakfast, three panelists (Bill Nack, Managing Director at The Forbes M+A Group; Bob Janson, Senior Vice President for GCG Financial; and Eric Wolf, Partner and Co-Founder, Bow River Capital) shared with business owners market insights and personal M&A experiences. Attendees learned, among other things, current changes in the transaction process, what buyers look for in a company, actions sellers can take to prepare for a successful transaction and reasons why deals fail in today’s market.
Joanne Baginski, Consulting Partner at EKS&H, moderated the program and began by asking how transactions are changing in 2016. All three panelists agreed that both buyers and sellers are taking a more disciplined approach to the deal process. According to Bill Nack, “we are seeing buyers who are making sure the ROI is going to be there post-transaction. Quality of Earnings studies are more common placed, for example, which helps buyers ensure profit and loss statements are accurate.” On the seller side, Bob Janson explained that sellers are discovering and addressing all potential liabilities prior to going to market, such as employee benefits, risk management, etc.
Next, panelists were asked how buyers identify good businesses and what sellers can do to help their companies stand out. Eric Wolf explained that as a private equity firm, he looks for organizations with substantial growth opportunities and that are well positioned in an expandable market. Panelists discussed the importance of seller preparation to avoid common “red flags” such as a concentrated customer base, too much owner investment, legal issues and unorganized financials. Joanne emphasized the importance of disclosure sharing that she saw one deal that had 30% of the purchase price held back for 3 years to deal with undisclosed tax issues. Eric agreed disclosure was important saying, “if we uncover something during due diligence, it calls into question everything else you’ve shared.”
When asked about the economy and which segments are heating up, Bill shared that in 2015 manufacturing and healthcare had higher multiples, while technology was down from 2014. However, he explained that the real key to securing a higher multiple is to have predictable and reoccurring revenue. Bob encouraged the audience to follow the “Index of Economic Indicators.” With a 60-year track record, this tool is a good indicator of economic trends.
Panelists also shared some of the reasons deals fail. Bill explained that there are things that owners can and can’t control that make deals fail including market timing. For example, he knows of two owners that took their oil and gas companies off the market due to the drop in oil prices. He also shared his own experience with selling his construction company prior to the burst of the housing bubble in 2008. While the purchase price was less than he had hoped for, he said, “it was a minor miracle I got any money out of it.”
Bob encouraged owners to think about what will happen after the sale. The resulting capital will need to create personal cash flow and sometimes it can be hard to separate personal and business goals. “The best time to make a decision is not in the member, but well in advance,” he advised.
In conclusion, Joanne asked each panelist to share one last piece of advice to business owners. Bill encouraged business owners to take advantage of what he described as an “aggressive and frothy” seller’s market. “Buyers are paying top dollar now, but it is uncertain what the future will look like past 2017,” he said. Eric advised owners to spend time developing their “pitch” prior to going to market. He had a company sell for 30% more than the competition based on what he believed was the upfront preparation the team did in explaining why it was well poised to take advantage of the market. Finally, Bob urged owners to take a deep breath and think about what will happen after the deal. He explained the importance of assembling a team of trusted advisors and taking time to make the right decisions at the right time.
Audience response from the event confirmed that the information share by all three panelists was interesting and informative. For more information about timing the market or other exit strategies questions, visit www.ForbesMA.com or call 1-303-770-6017.
By the time a business owner is thinking seriously about a sale, the window of opportunity is often already closing. This is part of the reason that more than 70% of deals leave money on the table and more than 50% never get to the finish line. It should be tempting in the current market, when strategic buyers have cash on the balance sheet and financial buyers have capital, to explore exit options.
Sellers should always be considering and weighing their options and should plan their possible exit three to five years in advance. The process begins with a rigorous analysis of the business, including sales, accounting, legal, operational, management and staffing. Owners must determine what needs to be done prior to a sale, at the sale, and after the sale.
A team of nationally recognized business transaction experts recently came together to share the most important advice they provide sell-side clients in the current M&A environment.
Bob Forbes, President, The Forbes M+A Group: Identify the key levers that can increase the value of your business — beyond just EBITDA.
Everyone knows they need to focus on growing revenue prior to a sale, but, beyond that, smart sellers are determining what key drivers could make their businesses more valuable. Perhaps employee turnover is an issue in your industry. Recognizing that and implementing strategies to reduce it could be a critical competitive advantage that would increase the value of the sale. Maybe concentration is a problem in your organization. Rather than focusing on increasing all sales, a more advantageous effort might be to identify ways to diversify customers, products, or regions.
Joseph Janiczek, Founder and CEO, Janiczek® Wealth Management: Consider the length of time a life-changing liquidity event must sustain you and what you want to do following the sale.
Many sellers who are of an older, more traditional age for transition face their transaction thinking about retirement and financial independence. There may be family, philanthropic, and legacy considerations that should be explored and these sellers are generally looking for a more conservative, lower-risk asset plan. On the other hand, younger entrepreneurs who plan to sell a business require a whole different kind of post-transaction plan and perspective. They might be thinking about their next deal or their next project and likely want to “stay in the game.” These sellers may become angel investors or may get involved in real estate investments.
Joanne Baginski, CPA, CM&AA, Consulting Partner, EKS&H LLLP: Sellers should conduct due diligence as comprehensively on the buyer as they are doing on you.
This advice is particularly important if an entrepreneur plans to stay with the business after the sale or if it is going to be a multi-phase (e.g., “two-bite”) sale. However, even if the transaction is 100%, sellers often have ideas about protecting their employees or legacy longer term. Do they know and understand your business? In some cases, a financial buyer might provide better options for the business and its existing employees, but, in other situations, a strategic buyer might be right. In either case, a seller can and should ask about previous deals the buyer has been involved in and might want to ask to speak to sellers from past investments.
Pål Berg, Managing Director, Northern Capital: Don’t get greedy — be prepared to take a little less now so that you don’t have to take a lot less later.
Yes, there are windows, and when you see one sometimes you need to take it. All you have to do is look at the oil and gas industry today to find people who should’ve sold years ago. Similarly, buyers should not only consider the highest offer. I’ve had experience with a private equity buyer that knew nothing about the oil and gas industry. In the end, the deal fell apart because they were nervous about the cyclical nature of the business. Several years later, we went back to market. It may have gotten a lower price, but the buyer was right, and a successful sale was achieved.
Lisa D’Ambrosia, Managing Director/President, Minor & Brown, PC: Both buyers and sellers are more cautious than ever but both are looking for the right opportunity, and the right advisors help.
While there are opportunities, this is a very conflicted market. As the due diligence process takes longer, the risk of a sale failing increases. This risk can be minimized by advance planning and preparation prior to entering the market place. Issues arise during the process that really shouldn’t create but a well prepared Seller can address potential issues earlier in the process to minimize delays. The right team of advisors can help you prepare and also help you determine what does and doesn’t need to be an obstacle. Each transaction has different challenges and, therefore, opportunities which need to be identified early. Having an experienced transaction team of advisors greatly increases a Seller’s likelihood of success not only for the transaction closing but more importantly having the transaction close at the anticipated purchase price and structure. Many clients who just have tax preparers don’t ask the right kinds of questions.
John Brown, CEO, Business Enterprise Institute, Inc.: Pre-sale exit planning is key. Sellers need to think about their potential sales earlier than ever.
Particularly for sellers who have not been involved in a transaction before, or have not been involved in one for a long time, preparing for sale before going to market can provide a myriad of benefits in terms of time and money. Proper planning can help increase the likelihood of transaction success, identify costly regulatory and compliance issues, and decrease the risk of inaccurate financial statements and resulting recourse.
Preparing your business for sale involves more than just cleaning up your books. Determining future needs (well in advance), strategically assessing buyers and offers, leveraging experienced advisors, and improving value-added business drivers will ensure the greatest chance of a successful transaction at the greatest possible value.
Professional Advisors and Buyers Shared First-Hand Experiences with Selling a Business and How to Avoid Common M&A Pitfalls
The Forbes M+A Group was pleased to moderate a panel of business owners and professional advisors who recently have been through the process of selling a business. During this free event, the guest speakers shared candid, first-hand stories of their personal successes and failures, as well as advice they would give to other business owners considering selling a company. The “war stories” shared proved to be extremely enlightening and attendees walked away armed with a deeper understanding of what it takes to close a successful M&A transition.
What Does the Market Look Like?
Adams Price, Managing Director of The Forbes M+A Group, began the program by asking panelist, Nate Raulin, Vice President of Excellere Group, to discuss current market dynamics. Nate explained that it was a seller’s market with lots of strategic buyers and readily available financing. He did not anticipate a change in the market status unless an unforeseen big event caused buyers to pull back.
What Advice Do You Have for Sellers?
Next, Adams asked each business owner to talk about the selling process and share any advice they would offer owners thinking about an exit strategy. Laura Hutchings, former CEO of Populus, began by sharing that what she thought would be a 2-3 month selling process ended up taking 6 months, which was still very fast and required a lot of focus. She had four words of wisdom to share with prospective sellers:
Lesson #1 – You need to take a lesson from Kenny Rogers and “know when to hold ‘em, and know when to walk away.” “Your greatest asset is the ability to walk away,” said Laura. “This puts you in a position of strength.”
Lesson #2 – You also need to know when to say yes. “Owners need to go into negotiations with a clear focus and know what winning looks like for them,” she said.
Lesson #3 – Understand that things will change. Owners need to realize that no one will ever run your company the same way you do. “I was ready for a change on a personal level, and that was very important. It helped me cope with the way the company changed after the acquisition,” shared Laura.
Lesson #4 – Don’t underestimate how much time it will take to close the transaction and have a very strong management team in place that can handle the day-to-day operations. “The worst thing that could happen is to miss financials, while you are focusing on a transaction.”
Greg Greenwood, Founder and CEO of Idella Wines, also shared his experience with selling his former distribution and manufacturing business. “We started thinking about selling in 2003, but didn’t sell until 2012. We sold 60% of the company, stayed on for 8 months, and then sold the remainder in a Two Bites of the Apple transaction. For us, the hardest part was looking in the rear view mirror and letting go,” said Greg. “Fortunately, we had done a lot of work with a life coach and knew what we wanted to do next.”
What Where the “Gotchas” in Your Due Diligence?
“We missed one thing in our asset purchase, which I actually didn’t find out about until years later, “said Greg. “My employment agreement included a 2-year non-compete, but the contract said 5 years.” Otherwise, shared Greg, he and his wife made sure everything was well documented, which was key. Laura agreed. “You need to have all your ducks in a row and always run your business like you are planning to sell it,” she said. “We spent many nights and holidays gathering documentation.”
Nate added that he has personally spent night in sellers’ attics looking through documents. “Knowing the details before you start the transaction process is very, very helpful.” Adams shared a key point regarding the importance of properly handling networking capital. “Lots of owners keep net working capital in the business,” he said. “But holding excess net working capital rather than just what you really need, can cause problems.” Laura said she would have handled net working capital differently. “Having money in the bank seemed like a good thing; but we should have run it leaner.”
Who do you let know you are doing an M&A transaction?
As a business owner, it can be hard to decide who to inform about a pending transaction. On one hand, you may need help from some of your team to gather the necessary documents. On the other hand, you don’t want to alarm employees unnecessarily. Adams shared, “We had one client who was keeping the transaction details confidential, but was making plans for the COO to run the business going forward. Unware of the plan, the COO resigned prior to the transaction because he thought the company was in flux and needed stability for his family. So, who did you tell about your transaction, and why?”
Greg answered first saying, “We knew we needed cash to meet our goals, so we told the entire management team we were going to see off some of the business, along with the timeframe and the intention. We avoid issues with employees by implementing an incentive plan that gave them all a piece of the pie.”
“I only told my husband (a partner) and the other partner who was our COO,” said Laura. “Then, about 2 to 3 month before the due diligence process started, we told the controller. That’s it. We knew that the team needed to focus on execution, plus there was a lot of uncertainty. We didn’t want to take the team through the ups and downs. It was emotionally taxing enough just for us.”
Next Adams asked Nate to share details on a deal that didn’t work out as planned. “We had a great opportunity in the healthcare industry,” said Nate. “Unfortunately, the accounting information was way, way off. When we received the adjust numbers, the expectations were so misaligned it could not be overcome.” Adams confirmed the importance of performing a Quality of Earnings Review as a first step in due diligence to see what earnings look like without anomalies. This helps avoid misunderstanding around the value of the business.
What other advisors were critical to the process?
Bar none you need experienced advisors was the panel consensus what asked what advisors were critical to the transaction process. “We brought in a law firm and investment banker,” said Laura. “You pay your advisors a lot for their advice, so you should take it. Attorneys are very risk adverse, but their advice was right on most of the time.”
Greg said he created a three-legged stool by hiring an accountant, lawyer and investment banks. He also had a couple of personal advisors, which we found very helpful. Adams suggested a fourth leg to the stool would be a wealth management advisor.
What top three pieces of advice would you give sellers?
In conclusion, Adams asked each panelist to give sellers three pieces of advice. “Be prepared,” Nate began. “Even in a perfect market you need to have expectations aligned. Figure out what you want in a transaction so you can find the right fit. Second, if you are looking for a partner make sure to do your homework and get their references. Finally, be ready for a long process. It is a second job.”
“First, know what you want and write it down,” said Laura. “Second, don’t be afraid to pay for good advice. It will pay for itself many times over. Make sure to get references and pick someone you can trust – someone you can have a beer. Finally, be emotionally ready to let go. You have to go with the flow and keep a sense of humor.”
Greg concluded the panel discussion saying, “Keep it light, but stay focused. Get very clear on why you are selling and what is going to come next. A life coach can really help you determine what you want to do next. Be intentional in your life and dream about what you want to accomplish after the sale.”
All three panelists and the moderator did a terrific job of providing relevant, educational and actionable advice for potential sellers. For more information about preparing for an exit strategy, visit www.ForbesMA.com or call 1-303-770-6017.