Selling Your Business is a Process [Transcript]
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[Plan Your Future Today]
[Alex McGlynn, Vice President, Mergers & Acquisitions]
We’re here today to talk about potentially selling your business and the considerations that come along with that. When you think about selling your business, it’s always key to think about who might the buyer be and what might the buyer be interested in. When we think about what makes an attractive business a valuable business, it usually starts with a loyal customer base, strong, organic growth, visibility into future performance, and an organized and efficient go to market plan. So, one thing I would leave you with, as you’re thinking about selling your businesses, is think about what the business will do in the next owner’s hands. Are you setting up a business that’s going to continue to drive value for the next owner?
When you’re thinking about selling your business, there’s a lot of different ways to go about it. Oftentimes there’s one very logical buyer that you might’ve started a relationship with over the years in your industry, or in a tangential industry. And that might be one potential buyer, when you do a preemptive bid and pursue a deal. There’s also the ability to market a transaction to a broader audience, which can drive the competitive dynamic in a transaction, and offer potentially more value. The balance between these two is negotiating with one party is obviously much more efficient than negotiating with several parties. So that will be a shorter timeframe. It also will be a little more confidential, and your business will not… That information of you selling your business is very sensitive to your customer base and your suppliers potentially. And so you might not want that slipping into the industry.
So we oftentimes, depending on the seller’s objectives and whether it’s maximizing value, maximizing confidentiality, confidentiality, or maximizing efficiency in the process, we’ll either go for a more preemptive strike or a targeted strike on a select group of buyers or a more broad auction. Those are discussions you can have with your advisor or your group of advisors, as you think about the best alternative for your business. When you’re thinking about transitioning your business, there’s really three types of buyers. The first that we’ve outlined here as a financial buyer. A financial buyer might come in the form of a private equity group or a family office. These are funds that are raised either through endowments or large pension plans or high net worth individuals. They really look to get a equity return, 20% and above return, by investing in operating businesses.
So the typical form of a private equity transaction is when they come in and buy a majority of the equity, but make sure that management stays involved in the business to run the business and hold a smaller piece of the equity. But that piece can often grow. And private equity is really in the business of buying businesses, improving and growing those businesses through their capital infusion, or other attributes they can bring to the transaction, and then selling the business in the future. So, one thing to think about is we often refer to the private equity buyer as a… You know, you can get two bites of the apple, one at the initial transaction and a second when they’re ready to exit the business. So the key considerations here are management is most likely going to need to be involved in the business after the sale. And you’re also going to be reporting to a new majority equity holder, a new board of directors, if you will.
The second bucket of buyers are more strategic buyers. These are either vertically integrated players in your industry or in tangential industries that are looking to grow in your industry. So think about that as competitors or suppliers that are really looking to grow market share. The one positive thing about strategic buyers is they oftentimes have synergies that they can draw from combining businesses. So whether that comes in the form of cost savings or new revenue opportunities, cross selling other products through a different platform, they look at the businesses on a combined basis and are really able to drive efficiencies through that. This sometimes, because of those synergies, they oftentimes can pay more than a financial buyer, but they also might have a more drastic impact to the employees and the management team, as they’re looking to drive cost efficiencies through the combined business.
The third form of buyer is an internal buyer. And so think about this as a, whether it be selling to your employees, selling to a key manager, selling to a minority holder in the business today. And oftentimes this is a more negotiated transaction, internally negotiated transaction, very confidential, but might not result in the same headline valuation that you might see from the other two financial or strategic buyers by running a process. When you’re thinking about who do you sell your business to, whether it’s private equity or strategic buyer, it’s really important for you as a seller to do some diligence on who the buyer might be. Key questions to ask are, what experience have you had in my industry? How have you interacted with previous management teams of companies you’ve bought? What are your ultimate goals for this business? Is it selling in five years? Is it consolidating with another industry player?
These are important facts to understand, as you think about the legacy of the business you’ve created and how that rolls in to a new buyer’s hands. Oftentimes value is a key attribute in picking who the ultimate buyer of the business will be, but there are some more qualitative facts that are worth diligencing during the process. One thing that we would suggest as you think about potentially transitioning your business is first and foremost, get your thoughts combined and consolidated, and then reach out to a group of advisors. Whether that be financial advisors, brokers, attorneys, or whoever your centers of influence are in your community or in your industry, and think about how do we position this business to be transferred? That can sometimes be five years before the transition takes place or five months before a transition takes place, but either way you need to have your ducks in a row in order to pursue a transaction.
If you hire an advisor or a broker to sell your business, there’s often a form of pre-marketing that takes place. That’s really organizing the business, understanding the intricacies of the business and the financial performance and potential hurdles that buyers might come across. There’s also outlining who the buyer universe is and who the target buyer universe is and how to approach them. There’s also thinking about what the financing continues or considerations are. So how is the buyer going to finance this business? Is there going to be a form of seller equity? How do we as business owners feel about that as part of consideration? And then, the diligence process is something that does take a long time to pull together and lots of man hours. And it’s something that is much more time intensive than normal operating business days.
So in addition to running your business, you’re also pulling together diligence to allow the buyer to get comfortable with the business they’re acquiring, and finance that business. And then there’s the final negotiation with the buyer. So an advisor can help you along the way here, either organizing, streamlining and serving as the middleman in the transaction, that is oftentimes a lubricant for the transaction, both between the buyer and seller to ensure that there is a strong business relationship thereafter as well. We’ve laid out here a few key thoughts and items to prepare. Again, this is not only for if you’re thinking about selling your business in the next two years, but if you’re thinking about selling your business in the next 10 years, these are things that you should start thinking about putting in place so that you get the most value for your business that you’ve created.
First and foremost is the preparation of the financial data. So cleaning that up, getting that house in order, whether it’s using a third party auditor or even a more internal accountant, or CFO, or controller, to really make sure that the financial data is up to date, is reflecting the actual performance of the business. For family owned businesses, I’d also suggest pulling out potentially personal expenses that might be involved in the business, as that will be a key item that the buyer might want to exclude from the underlying operations of the business. Also think about how is this business going to continue to perform after the business owner and potentially management team walks away. Is there a second level of management in the business that can continue to run? Is there an external party that might make sense… External, you know, employee or industry player that might make sense to bring into the business to allow that continuity?
There’s also think about the seasonality of your business. When is the right time to go to market? If you’re in a business, for instance, that’s tied to the overall housing market, think about the cycle in the housing market, as buyers will be thinking about that as well. And also it’s always helpful to lay out a business plan or a strategy. What could the business do in your hands if you were not to transition it? That is the case that you’ll want to lay out to the potential buyer universe on how to maximize value and how to get the most for your business that you’ve created.
And then lastly, working capital is something that comes up in a lot of transactions, whether it’s inventory levels, aging of inventory collections from your customers, the days outstanding on your payables. These are key items that dictate cashflow within a business, and buyers are going to scrutinize working capital very much, because that drives the cashflow from the business. So think about cleaning up your inventory, organizing, streamlining your payables and your receivables and getting that house in order. So that is really low hanging fruit for a lot of buyers, because that’s the way they look to drive value from businesses. So think about doing that on your own, and then getting that value from the buyer in the form of the purchase agreement.
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