What a Company Owner Can Learn From An Investment Banker

Most business owners will tell you they have no need for an investment banker or consultant to help them sell their Company. Most are unknowingly wrong.

The truth is, having relationships with investment bankers / consultants, regardless of whether a company is undergoing a transaction or not, grants a business owner access to the information they need to do their job, which is to grow and maximize the value of their business. Here are several things a business owner can learn about his business by developing relationships with and engaging in conversations with investment bankers / consultants.Continue…

Had I Known while Selling My Company – The Investment Banker

Honestly, when it comes to my investment banker while selling my company, I got it right. I just wasn’t aware of how right I was until we were really deep into the deal. I’m very thankful now that I listened to a friend. There were a few things that came up in the deal that baffled me, really were over my head, and had we not signed with the one we did, I’m not certain the deal would have ever gotten closed and if it had closed, we may not have gotten top dollar.Continue…

When Selling a Business, Create a Transition Plan

Most business owners are familiar with the idea of exit planning, but if a departing CEO truly wants to ensure the best outcome when selling a business, developing an effective entry plan commonly known as a “Transition Plan”, with the new owner-operator in mind is vital. By preparing his business and the eventual buyer for the transition, an owner can paint an attractive picture of his business, not only helping to obtain fair value in a sale, but also leave it in new hands with peace of mind.Continue…

How to Screw up the Chance of a Good Deal when Selling A Company

All company owners dream of the ultimate exit / selling a company that he has spent decades building.  As such, in the years leading up to the sale, most owner-operators become marketing experts – articulating the strengths of their company, showing would-be buyers the potential for continued growth in order to demonstrate that buying his or her Company would be a great bet.Continue…

Seller’s Market

There’s less and less elbow room in the world of buying private companies. The crowding of the marketplace was confirmed by recent data from Pitchbook, which found that the global number of active private equity firms is up 143% since 2000. In the U.S. alone, the number of active PE firms has nearly doubled, from 936 in 2000 to 1956 in 2014.

The rapid expansion of the industry has created a transaction community that’s become expansive and fragmented — a seemingly limitless number of PE firms, raising more capital than ever, looking to buy up the most promising companies. This makes for an increasingly competitive landscape for investors, all trying to find, connect with and close the best deals first.

For private companies, the implications are simultaneously advantageous and complex. While it’s been called a seller’s market — companies who are raising capital or approaching a sale have an increasingly large pool of investors to consider — navigating such a transaction has presents some difficulties for CEOs looking for the best fit.

Private Equity Response

Much has been written about some of the many outcomes of this trend both in how PE firms market themselves and manage their portfolio companies. Firms are now touting their ability to add value to companies strategically, acting as specialists, focusing on their role as operating partners, and adapting business development efforts, from utilizing online deal networks to publishing their expertise to drive awareness. Steepening competition not only drives deal sourcing angst but also reinforces the importance of finding a way to drive returns that will satisfy their LPs.

Seller’s Choice

Although there are a record number of firms looking to buy, private equity’s response to this trend means private companies need to take the time to consider what’s most important in the sale. With all the ways private equity firms are adapting, companies have both the luxury and the curse to be indecisive.

This means asking tough questions about the future of the business after a sale. Do you want financial stability to pursue rapid growth, an operating partner to help restructure inefficiencies, or professional strategic help from those with deep experience in the industry?

Answering these questions can cement not only the future of your business, but also help ensure the right outcome for you personally after the sale. If you want your company to stand the test of time, then choosing the right successors who are committed to growing the company is essential. If your goal is to maximize the sale price, then planning and undertaking strategies to add value in the years leading up to the sale is key. Regardless, it’s essential for a business owner to think years ahead about how company performance and market conditions will impact interest from different types of buyers. Whatever the motivation, tailoring the sale to the future you envision for yourself and for the company makes finding the right buyer that much easier.

Working the deal

The good news is there is a buyer for each of these priorities — the aforementioned multitudes of private equity firms, each with a different strategy and focus, or another type of buyer altogether. The bad news is that it’s difficult to find them alone. This is where a relationship with an investment banker comes in handy.

But therein lies another choice to be made. Choosing an investment banker might be the most important decision in pursuing a sale, as they maintain relationships with many private equity firms and know what type of buyer will fit with your priorities. But that community too has splintered and magnified, as bankers move on from bulge brackets, starting new boutique firms and regulation has made it so that almost anyone can be an M&A advisor. So how do you find the right banker to lead you through the deal?

It’s possible you’ve been cold called over the years by bankers interested in your business. If you haven’t yet established a relationship, it’s time to do a little speed-dating. Call back a few of those bankers; get recommendations from peers, lawyers, and accountants; or use an online platform to source new relationships. Have a few conversations and see how they sell themselves–this is where you ask the tough questions and evaluate fit:

  • What transactions have they completed in your industry, and how recently?
  • How many M&A assignments in the last 3 years didn’t close, and why?
  • How do you develop your buyer list for each transaction?
  • What valuation do you expect for my company, and why?
  • Who from your team will be doing what for my transaction?

All of these questions will weed out the advisors most likely to derail your deal, and you’ll be well on your way to finding the best buyer among the growing thousands[1].

While narrowing down a buyer list for your business may seem more daunting than ever, the increased competition and optionality is ultimately a good thing for sellers. If enough time is given to answering the most important questions about the future of the business, you’ll find the buyer best suited to making that future a reality.

[1] Axial Markets – July 2015

There is No Substitute for a Strong Management Team

One of the biggest misconceptions that business owners have is that the value of their business is directly tied to their personal involvement in managing all aspects of their operations. In fact, nothing could be further from the truth. The attractiveness of the business to a buyer is what is transferable to the buyer not the ongoing management prowess of the seller. If the owner/seller has a management team that can’t sustain the growth of the business without his personal involvement, the business has significant future risk and as a consequence, represents little value to a buyer. To some owners, this may seem counter intuitive and an assault on their ego, but it’s a fact. If the business can’t survive and grow without the owner’s daily interaction, its value will be diminished dramatically no matter how much it has grown or generated profits in the past.[1]

Peter Drucker, the world’s foremost management consultant, held that a fundamental requirement for creating a successful enterprise is “building a top management team long before the new venture actually needs one and long before it can actually afford one.”

A Top Value Driver

Most private equity groups and other professional buyers judge the value of the companies they evaluate as possible acquisitions by assessing the strength of a company’s value drivers, the most important of which is its management.  These savvy investors recognize the value of great management teams and don’t always bring in star outside managers to run the companies they buy. In fact, many prefer to acquire a company with strong management in place. Creating, motivating and retaining great managers is key to capturing future business value. Without a strongly motivated and secure management team, the risk to a projected earnings stream is just too high.

Having “best-in-class”, seasoned management is indispensable to any company’s long-term future.  The reason is simple: management is responsible for the creation, direction and rate of growth of all other value drivers. Things like customer diversification, a proven growth strategy, sustainable revenue, improving cash flow, competitive advantage and financial controls all depend on good management. More effectively than any other value driver, a top-notch management team creates transferable value.

A business owner cannot be the only person responsible for driving growth if a company is to evolve beyond its current abilities. To realize the potential a buyer will pay for, sellers must create transferable value beyond the limitations of the current owner. When it comes to selling a business, transferable value matters more than the competitive multiple applied to some measure of earnings.

Transferable Value

Transferable value is a company’s ability to continue operating successfully, with minimal disruption to its cash flow, after the owner leaves. In the absence of transferable value, businesses can’t be sold for enough money to bridge the gap between what owners realistically have today and the amount they need to live a financially independent future. Any qualified advisor helping owners transition out of their businesses must have a solid understanding of what can be done to increase transferable value. The strength of the management team is integral to the value enhancement process. Business risk identification, succession and contingency planning are all part of the first wave of business value enhancement and owner readiness conditions needed to formulate a successful transition. But all three must be in concert to achieve the best possible transfer value.

Succession Planning

Advisors skilled in succession planning as part of a business value enhancement process are constantly involved in helping owners create, develop, motivate/incent and retain, excellent management teams. To accomplish this, owners should look to executive talent providers who have the skills and experience needed to develop superior management teams. These trusted advisors have helped owners recruit and secure outstanding talent. They possess excellent insight into the company’s corporate culture and can provide the needed skills offered by exceptional performers.

Owners must keep in mind that management (not the owner) will be responsible for developing other value drivers like growth and operating efficiencies. Securing outstanding management is necessary to move beyond any limitations of the owner and current team.

Management team development is indispensable to business growth, risk reduction and transferable value. A good succession plan will help the owner evaluate existing management based on their current performance and ability to further develop the company. Additionally, for an owner’s eventual exit to be successful, management must remain after the owner’s exit.  Third-party buyers will insist on it, and if insiders (key employees or children) assume the reins, they must be capable of managing the company if the owner is to get paid what the business should be worth. For this reason, part of every transition plan is the creation of a succession plan with incentives not only for managers to perform well but to also stay after the owner exits.

A Team of Experts

A good exit advisor understands the broad and diverse range of information and experts involved in the transition planning process. Like a General Contractor’s role in a construction project, this advisor has a network of experts who can complete specifically assigned roles in the overall project. In transition planning, these include succession planning, strategic planning, personal financial planning, estate planning, tax planning, contingency planning, and transaction intermediaries to name a few. This is quite a group of professionals to identify and coordinate to complete the task of getting what the owner needs to fund the next stage of his/her life. All the while the owner still has a business to run and customers to keep happy.

Most professional advisors (CPAs, attorneys, financial advisors, transaction intermediaries, etc.) are not educated or experienced in finding, developing, motivating and retaining best-in-class management teams, despite this being a critical requirement of business value! The job of a good transition advisor is to initiate and manage a process that describes what owners need to do to exit their companies on their terms and help them close the sizable gap between current business value and the value they need to exit successfully. A strong management team is a solid first step.

[1] Gary Ampulski , Midwest Genesis