Monday, May 25, 2015
By Gary Miller – Managing Director, Consulting Division, SDR Ventures
A crisis is looming on the horizon for business owners wanting to sell their companies. Currently, 80 percent of business owners of small- and middle-market companies who put their businesses up for sale never close the transaction. The reasons: 1) poor planning; and 2) overvaluation.
With the impending Baby Boomer tsunami, more businesses will be for sale than at any other point in history, creating a buyer’s market. This buyers’ market will cause significant competition. Businesses that do not plan well or overvalue their companies will be left out in the cold.
Many strategic and financial buyers with significant funds to invest are more cautious and reluctant to pay premiums for companies than a few years ago. Therefore, as a part of your planning process, owners should take these three steps to significantly increase their chances of selling their businesses.
1. “Think like a buyer.”
Most buyers want to purchase a company that has the following characteristics:
- A proven entrepreneurial management team in place that can continue rapid growth and expansion after the transaction closes. Most buyers do not want to replace current management of the company they are buying. Doing so adds a risk profile that could endanger the viability of the business going forward.
- A strong, realistic growth plan to continue value creation through market penetration and expansion, defined market niche and/or acquisitions.
- An ability to produce significant returns on invested capital coupled with strong positive cash flows.
- A sustainable competitive advantage.
2. Prepare before you go after a buyer. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win “first.” It takes six to 18 months to prepare your company for the buyers’ marketplace. Strong preparation steps are:
- Quantify the business value through a third-party valuation firm.
- Get rid of obsolete inventory. If your financial records show a higher value than market value, take the write-off now so that it doesn’t become an issue for the buyer.
- Audit your financial records by an independent accounting firm.
- Strengthen legal and contractual affairs.
- Install and improve operating systems and processes.
- Tell your management team that you plan to sell the company. Be truthful. Include them in the preparation process. To not do so could scare your key employees (the very ones you need to keep) when a buyer’s due-diligence team shows up to begin their due diligence process. This could trigger your key employees to search for new careers.
- To avert such a move, create management and key employee long-term incentive plans to stay with the company.
- Prepare for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on? Conducting your own a due diligence similar to a buyer’s due-diligence process allows you to discover any “skeletons” before the buyer does. It allows you to correct them or to put the best possible explanation forward to the potential buyer.
3. Select the right team to help prepare you to go to market. Assemble a collaborative multi-disciplined team of experts is critical to help prepare you to go to market. Five key team members are important to your success:
- A management consulting firm with strong business strategy expertise and transaction experience to lead the team.
- A law firm with significant transaction experience led by an attorney who is a CPA.
- An investment banking firm with deep transaction experience in your industry.
- An accounting firm with major transaction experience to guide you through the tax issues.
- A wealth management firm to help you plan wealth preservation from the transaction.
Gary Miller is managing director of Denver-based SDR Ventures’ consulting division. SDR is an investment banking firm that advises privately held middle-market businesses. Miller specializes in strategic business planning, and merger and acquisition and exit strategic consulting. He can be reached at 720.221.9220 or firstname.lastname@example.org.