Posts tagged with: buyers
“Attracting a buyer is like preparing for a beauty contest” – Gary Miller
Dog owners and breeders know that it takes years of discipline, training and preparation for their pure bred champion dog to stand out from the crowd and win the blue ribbon at the Westminster Kennel Club dog show. They know that the dog that ‘shows best’ will win ‘first’. They know the decision is in the judge’s hands.
To show best and win first in selling your business, it’s up to you to make your business both buyer ready and buyer attractive.
To Prepare Your Business, Think Like a Buyer
Before you enter the market place of potential buyers, preparation is essential not optional. Plan on at least 1-2 years of preparation efforts before you begin the 6-9 month transaction process. Yes, years. This preparation means all the difference in the value of your business and the price it will command in the market place.
Preparation is a choice far too few owners take seriously. Preparation makes your business stronger, more attractive and more valuable. Without preparation, you give (gift) all the leverage in a negotiation to the buyer and the buyer’s intermediary.
To think like a buyer, there are a few key steps that will make your business more attractive and appealing to potential buyers. They include:
- Getting a base-line valuation performed by an independent valuation firm to quantify the current market value of the business.
- Documenting all assets and inventory accurately. Dispose of any obsolete materials or expired inventory to get to a true accounting of what you have.
- Cleaning up all financial records to show current market value of assets and inventory now to avoid any issue for your buyer. If you wait until you have an interested buyer and they discover that your financial records show a higher value than market value at that late date, it will weaken your negotiating position or worse, put the deal itself at risk.
- Investing in an audit of your financials now, done by an independent accounting firm. This will give you time to clean up/correct any errors or concerns identified. It also establishes a pattern of good business management.
- Bringing all legal requirements and records up to date. Revisit all vendor and client contracts before you pursue any buyer opportunity.
- Implementing and document all systems and processes for operating your business. If you’ve never documented anything, you have no leverage to say what it’s worth. If the entire business is in your head, a buyer will not pay the full potential value of your business if they have to depend on you to achieve it. This step in itself adds value to the bottom line and drastically reduces business continuity risk.
- Deciding now who on your management team will be essential to the successful transition of the business to new ownership. Tell them your plans now and what you’ll do for them because they help you through the transaction process. Without them, your business is much less attractive to your buyer. You need them on board to champion the business when your potential buyer arrives to do their due diligence.
- Executing your own internal due diligence now to identify what is ready, what is not ready, where you are strong and where there are holes in what a buyer would expect to find in the due diligence process. With a timeline of years, you give yourself the luxury to methodically clean up, resolve and eliminate any potential red flag. The more complete, transparent and prepared you are, the less likely the buyer’s team are to dig for hidden problems.
Your All-Star Team of Advisors
To prepare you, your business, and your team to take your business to market, you need an all-star team of advisors, not just one or two. The most successful transactions close when you surround yourself with a cooperating, collaborating coordinated team of advisors to ensure your business is buyer ready and buyer attractive to achieve the outcome you want on your terms. In addition to your current business attorney and accountant, your core team must include at least:
- An exit strategist to manage the preparation of your business for you and orchestrate your transaction team; so you can stay focused on what you do best – accelerating growth and maximizing the value of your business.
- An attorney with significant transaction experience in the type of transaction you want to close. A divorce attorney or real estate attorney or a litigation attorney may not have the experience to give you the leverage to negotiate the best deal.
- Your Chief Financial Officer – even if you’ve never had a CFO on your team in the past. Even a part-time CFO will help position your business in the best light for a buyer.
- An investment banker with substantial transaction experience in your industry can be invaluable in negotiating the deal and moving the process to closure.
- A tax accountant experienced in major transactions who can evaluate and guide you to minimize the tax impact of the deal by preparing years in advance.
- A specialist wealth advisor to help establish your wealth preservation plan beyond the business, long before that plan will be funded by a successful sale to your buyer.
You need the entire team, not full-time, but all on board early and engaged to advise you through the preparation stage and right through the transaction to your ideal buyer.
Select the best advisors you can find, not the cheapest. The best, who deliver the most value, will pay for themselves many times over in the returns you receive.
Think like a buyer. When you and your team analyze your business through the eye of your ideal buyer, over time, you will add value and increase the leverage you can command in the deal. That’s how you attract the best buyers, “show best” and “win first”.
If you’re wondering when is the right time to sell your business, you may want to wait until your company is generating $1 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
What’s so special about the million dollar mark?
Hitting the million dollar mark is a tipping point at which the number of buyers interested in acquiring your business goes up dramatically. The more interested buyers you have, the better multiple of earnings you will command.
Since businesses are often valued on a multiple of earnings, getting to a million in profits means you’re not only getting a higher multiple but also applying your multiple to a higher number.
For example, according to research at www.SellabilityScore.com, a company with $200,000 in EBITDA might be lucky to fetch three times EBITDA, or $600,000. A company with a million dollars in EBITDA would likely command at least five times that figure, or $5 million. So the company with $1 million in EBITDA is five times bigger than the $200,000 company, but almost 10 times more valuable.
There are a number of reasons that offer multiples go up with company size, including:
- Frictional Costs
It costs about the same in legal and banking fees to buy a company for $600,000 as it does to buy a company for $5 million. In large deals, these “frictional costs” become a rounding error. In contrast, they amount to a punitive tax on smaller deals.
- The 5-20 Rule
I first learned about the 5-20 rule from Todd Taskey, M&A Advisor at Potomac Business Capital in the Washington, D.C. area. He discovered that, in many of the deals he does, the acquiring company is between 5 and 20 times the size of the target company. I’ve since noticed the 5-20 rule in many situations and I believe that your natural acquirer will more than likely indeed be between 5 and 20 times the size of your business.
If an acquiring business is less than 5 times your size, it is a ‘bet-the-company’ decision for that acquirer: If the acquisition fails, it will likely kill the acquiring company.
Likewise, if the acquirer is more than 20 times the size of your business, the acquirer will not enjoy a meaningful lift to its revenue by buying you. Most big, mature companies aspire for minimum top-line revenue growth of 10 to 20 percent. If they can get 5 percent in organic growth, they will try to achieve another 5 percent through acquisition, which means they need to look for a company with enough clout to move the needle.
- Private Equity
Private Equity Groups (PEGs) make up a large chunk of the acquirers in the mid market. The value of your company will move up considerably if you’re able to get a few PEGs interested in buying your business. But most PEGs are looking for companies with at least $1 million in EBITDA. The million-dollar cut-off is somewhat arbitrary, but very common. As with homebuyers who narrow their house search to houses that fit within a price range, or colleges that look for a minimum SAT score, if you don’t fit the minimum criteria, you may not be considered.
So When Is The Right Time To Sell Your Business?
If you’re close to a million dollars in EBITDA and getting antsy to sell, you may want to hold off until your profits eclipse the million-dollar threshold, because the universe of buyers—and the multiple those buyers are willing to offer—jumps nicely once you reach seven figures.
At first glance, it may appear to be a futile contradiction for a CEO to try to grow the business and plan the exit at the same time. But when you look at them side by side, you’ll see that growing the business is an essential early phase of any exit plan. The mistake is trying to look at them as sequential projects instead of concurrent projects. The requirements of one will guide the decisions of the other and vice a versa.
- By you increasing revenues – a benefit to potential buyers – so growth itself becomes a growing the business saleable asset
- Increased revenue from growth is easy to measure and monetize when the business is being valued for a potential sale.
- When decisions are made that lead to growth, immediate goals are met. When those same decisions are aligned with the long-term goal of how the owner will exit the business, those decisions have greater strategic value.
- Test every decision – When the long-term goal of the owner’s exit is known throughout the leadership team, every decision can be tested against these long-term criteria before implementation.
- There are many options to consider when CEOs want to grow their business. The options they select have a direct impact on their exit strategy and timeline. And if the exit plan is in place, all options for growth can be sorted to align business growth with the CEO’s exit plan. Here are just a few basic options to use individually or in combination:
- Increase sales prices
- Increase new sales
- Increase volume of sales/customer
- Increase add on sales
- Increase life of each customer
- Open new markets
- Open new channels
- Increase capacity (sales, marketing, customer support, production, facilities)
- Reduce costs
- Reduce overhead
The forethought and documented strategic planning you invest to grow the business develops depth within the entire management team. That depth in leadership as well as the resulting measurable growth increase, adds value to the business that is very attractive to buyers.
As the baby-boomer generation ages, a multitude of succession problems are becoming evident. Each one compounds the effect of the others. Here are just a few that pertain to the small-medium size business market that you should take note of now:
- In both the US and in China the children of baby-boomers are much less likely to take on the family business.
- According to family business expert Frank Schneider, statistics reveal that only a third of family businesses are successfully transferred to the next generation.
- Recent research out of the Family Firm Institute and Babson University for Entrepreneurship report that the 70% of family businesses do not survive to the third generation.
- A survey by PricewaterhouseCoopers finds that one out of every two company owners plan to sell their business within the next 10 years.
- Many baby boomers have decided to step back and re-evaluate their lifestyles. A typical seller today is more likely to be in their 40s or 50s rather than their 60s or 70s, as was the case 10 to 15 years ago.
- People 55 or older own 30 percent of all businesses with employees.
- Businesses with employees are expected to grow in number by 22 percent every five years
According to David Fields, president of San Diego-based IBG Capital Markets:
“The intersection of private equity money and baby-boomer demographics means that [we] can conservatively assume a threefold increase in transaction activity for companies with employees as boomers move into retirement.”
As much as the statistics paint a picture of abundant opportunity for buyers and transaction experts, it’s not the same for sellers. One report out of British Columbia, Canada states that only 10% of all deals actually get done. The rest languish because the seller is not prepared or the sellers wait until it’s too late.
JOHN ZAYAC president and founder of IBG Business Service, Inc. in Denver, CO gives great advice when he states:
“The best advice I could ever give to the owner of a middle-market company is this: Plan for the sale of your business from the day you start it. Most business owners exit their business with less than six months of advanced planning, consequently receiving a mere 50 percent to 70 percent of the business’ potential value.
Appropriate planning, well in advance of a transaction, will allow a business owner to maximize company performance.”
The downside for sellers is that there is a window of opportunity before the supply of businesses exceeds demand. The vastly increased supply of small-and medium-sized businesses available because of baby-boomer retirement/reinvention will drive down valuations and give new leverage to buyers instead.
There are supply-demand implications of millions of businesses coming onto the market in a concentrated period of time. Owners are not factoring these implications into their exit planning in terms of timing, valuations, opportunity or successors.