You’re likely reading this for one of two reasons; you’ve reached a stage in your career where years and years (and years) of hard work have created a lasting business and it’s time to ride off into the sunset OR you’re a younger, possibly serial, founder who has taken the business to a level where it’s ready for the next generation of leader.
First off, congratulations. Building something of value is one of the hardest and most rewarding things we can achieve in life. As an owner of a small business myself, I know there’s no other endeavour with higher highs and lower lows. The requirement for thick skin and relentless tenacity are dramatic understatements. Now that you’re here, there’s one more project to complete and it’s likely the most important transaction of your life. Let’s make sure we avoid some obvious (and not so obvious) pitfalls.
1. FOOLS RUSH IN.
It may sound counter-intuitive, but we routinely turn down client engagements. As a boutique shop, it’s vital to have as high a closing success rate as possible and key to this is assessing and scrutinizing clients as much as they do us. 9 times out of 10, we’re turning away business because the owner(s) aren’t sufficiently prepared.
I can think of multiple occasions where business owners have called us ready to sell after hearing of a competitor who was bought, “in one day at a 50x revenue multiple”. I exaggerate of course but this is, in essence, how the story goes. Unfortunately, real life doesn’t usually work that way. In my experience, the only way to maximize satisfaction when selling your business is to do a lot of pre-planning. If I had to pick a timeline, I’d suggest starting to prepare for a sale at least 18 months prior to engaging a firm like ours. I do, however, strongly recommend calling a firm like ours at the outset of this process.
It’s music to my ears to speak with an owner asking for our quick assessment of their business and advice on initiatives that can be undertaken in the coming months / years to be ideally positioned for a sale. Providing a quick (and free) assessment is one of the best ways we maintain our high closing rate when the time comes to start the actual selling process.
2. ARE YOU REALLY READY.
“All things are ready if our mind be so.” This is Shakespeare’s way of telling us mental preparation is as important as being physically ready. And let’s be clear, being prepared and being ready are very different. Selling a business, like selling a house, is a stressful process. Similar to the day-to-day operations of your business, there will be unforeseen obstacles that pop up and need to be dealt with along the way. It’s a grind, it’s stressful and everyone needs to come with the mental fortitude to get through it.
I laugh with my colleagues often about feeling more like a psychiatrist than an advisor. So, what’s the best way to become mentally prepared? I’m of the belief that time is our greatest friend. Reflect early and often about selling; Am I ready, are my employees ready, is my family ready, what happens when the sale is complete and will I be truly satisfied are just a few topics to ponder. Also, make sure not to be too introspective; talk about these and other questions with family, friends, and confidants.
3. NO [COMPANY] IS AN ISLAND.
I won’t beat around the bush with this one – you need to hire the services of a seasoned, experienced, and aligned M&A Advisor if you want to secure the best deal for your company. In my 20+ years of doing this, I’ve had countless owners arrogantly (see #4) think they can sell their business themselves. I get it, throughout their career, they’ve been approached many times by potential buyers, likely know several competing firms they could reach out to and may have even entertained offers.
But there’s no way owners have the time or intimate knowledge of the process to get the best deal done. The “best” deal is the ideal combination of valuation, cash on close, earn-outs, vendor take-backs, succession planning, tax optimization, and legal structuring…all with the right partner at the right time. You already hire experts to do your accounting, taxes, and legal work. This is no different – expertise is required.
4. THINKING YOU’RE SPECIAL.
We all want to believe we’re better, faster, and stronger than the next guy (or business). There’s no doubt you’ve done a thing or two to distinguish your business from many of your competitors but too many people we meet attach a level of arrogance to their successes. It’s not surprising, business leaders by nature possess strong Type A personalities but you must bring a degree of humility to the sale of your business.
Selling a business is different than selling your product of service. Potential buyers will dissect, poke, prod, and assess your business in ways you never thought possible; and often, it’ll be a 25-year-old recent MBA graduate doing the work! Our role, as your trusted Advisor, is to talk the language of the buyers. On the one hand, we put together all the expected spreadsheets and presentations they want to see to get comfortable with the business as an investment. But, as importantly, we tease out the “secret ingredient(s)” that distinguish your company as a premium investment the buyers’ cannot pass up. The real magic of a successful deal is finding the sweet spot between arrogance and humility, with a dash of FOMO.
5. PRETENDING TO BE SOMETHING YOU’RE NOT.
There’s a pervasive misconception that the highest price equates to the best deal. This is simply not true. But due to this, we often come across businesses who have thoughtfully and pro-actively competed #1 & #2 above but have over-emphasized the importance of either top or bottom-line profits. To be clear, these are really, really important to buyers but not at the expense of stability or longevity.
Putting off capital purchases or hiring for vital roles such as sales just to make a particular financial period look better is like, “robbing Peter to pay Paul.” Imagine a scenario where you cut back on every possible expense and your adjusted earnings before interest, taxes, depreciation, & amortization (EBITDA) is (artificially) 25% higher than the previous year. You then attach a 7x multiple to it (because after-all, you’ve heard the range acquirors will pay is between a 5 – 7x multiple and you’re clearly at the top of the range (NOTE: time to read #4 again)) and behold, you have a valuation you believe is appropriate.
Let’s take this a step further, and somehow a buyer is found who accepts something close to this valuation on first blush. You’re thrilled. However, when the letter of intent (LOI) comes in, it looks something like this: (if you’re lucky) 50% will be paid in cash on closing, and the rest will be paid out over 2 – 3 years based on performance, meaning that as long as the business maintains at least the level of EBITDA you’ve recently achieved, you’ll be eligible to receive the remaining 50%.
The obvious problem is that over the next few years, the business needs to “catch-up” on its spending, significantly jeopardizing EBITDA and your remaining 50% payout. It’s important to understand the vast majority of buyers are sophisticated, and their job is to hedge their bets. Buyers will not be fooled into over-paying for a business. It’s similar to the restaurant that states, “Good. Fast. Cheap – pick two.” A premium valuation almost always comes with caveats that you need to be prepared to live with.
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