When business owners decide to put their company on the market, it’s natural for them to wonder:

What is my business worth? and What should be my asking price?

Those are fair questions – but consider the possibility that the first is premature, and the second is irrelevant.

If that sounds like heresy, let’s try to put both responses in perspective.

The Danger of an Asking Price

Tackling the second question first, it’s important to understand that, our normal approach is to go to market without a price – and it’s almost never failed us.

That strategy recognizes two important realities: We don’t know who your potential buyers are, and we don’t know their motives.

Your buyer may be:

• a similar business for which your company satisfies a strategic objective;
• a local or distant competitor seeking to gain your customers, expand their market share, or enter your region;
• a private investor looking to purchase a project as an income generator for themselves; or
• a private equity group.

For your company, its perceived value and ultimate selling price can vary dramatically depending on the nature of the buyer and what that buyer seeks to achieve by acquiring your business. And it’s important to recognize that your company might be worth even more to that one stand-out buyer than it is to you. Therefore, don’t fixate on setting a price that inadvertently places a cap on how much your business will bring.

The Evolution of Market Value

As for speculating as to what your business is worth, much of our value as M&A advisors is in redirecting your focus – from what your business might be worth today, to what it can be worth when it is ready to sell – and to helping you implement changes in your company that will help it arrive at peak value by the time it goes on the market.

Achieving that objective can take time, which is why the optimum sale period for a business – including the building-value phase – can be as much as two years.

During the preparation time, while we are doing our part – i.e., assessing your company and the market, recasting your financials, identifying potential buyers, and preparing to package and market the company – there are vital steps that only you as the owner can take.

Those steps are often company-specific, and we will customize our recommendations to your situation. However, on a more generic level, here are 12 proven approaches to:

• increasing the market value of your business and
• enhancing its ultimate selling price.

1. Build a solid management team.

A business with sales of $5 million and up needs a complete and solid lineup of officers and directors. Such a team might include a chief operating officer (COO), chief financial officer (CFO), sales manager and, if the nature of the business calls for it, chief technology officer or IT director.

It is also beneficial to create a board of directors that has at least two outside members. This professionalization of management can remove the stigma of the “one-man band” and communicate to potential buyers that your company has viability, value and desirability apart from your involvement.

2. Retain loyal employees.

A company’s greatest asset is its employees and perhaps its biggest value-increaser, and happy and loyal employees make for a strong company. Top management should have non-compete and/or confidentiality agreements, and solid benefit plans should be in place for all employees.

3. Grow in scope.

Some smaller companies are kept small to maximize the owner’s benefits – the proverbial “cash cows.” However, if building value is the goal, it may be important to develop new products or services, build market share, and expand markets or open new ones. Achieving strong, quantifiable growth builds value that justifies your investment of time and energy.

4. Grow in size.

While some corporate buyers and private equity firms see the advantages of purchasing smaller businesses, companies with less than $5 million in sales and an EBITDA of less than $1 million may be more dependent on continuing outside financing and lack the critical mass for both buying and selling power. As a consequence, many buyers may perceive smaller companies as too small for acquisition or undervalue them.

5. Stay on top of your market.

The value of a company may be contingent on its industry, its place in the industry, and the direction of the industry itself.

• How big is the industry?
• Is it headed up or down?
• Who is the competition?
• How big is the company’s market share?
• Is it time to change direction or diversify?

6. Demonstrate your agility.

Small companies can be very adept at pivoting, i.e., changing course and implementing change. You can add value to your business by recognizing and quickly seizing opportunities to reach new markets, fill voids in existing markets, and add or change products or services.

7. Raise your name and brand identity.

You don’t have to manufacture Kleenex, Band-Aids or Coca-Cola to have a strong brand identity. While the value of becoming a household name probably wouldn’t justify the cost to your company, you can and should pursue strong, positive name recognition within your industry. Through targeted advertising, trade association involvement, giving back to the community, and other strategies, your company’s name can become recognized as a leader in your industry vertical, and that can enhance its perceived market value to potential buyers.

8. Put your plans on paper (or screen).

Business plans, financial plans and personnel plans should all be in writing and kept current. Terms of employment agreements should be spelled out and in writing. Business planning and company objectives, etc., should also be in writing, visually communicated, and reviewed periodically. Contracts should be reviewed and maintained on a current basis.

9. Broaden your customer base.

Many smaller companies reduce their market value by becoming too dependent on a handful of customers or clients. Ideally, no customer or client should represent more than 10% of sales. Be intentional about expanding to new markets, introducing new products, and finding new customers that align with your company’s core business.

10. Take advantage of proprietary and other assets.

Patents, brand names, copyrights, alliances, and joint ventures are all examples of potentially valuable assets. So are innovative business practices, systems, procedures, and leveraged capacity. For instance, a commercial landscaping company turned a “down” time of year – winter – into a profitable season by installing snow plows on their trucks, utilizing their rolling stock and existing workforce to become a snow-removal resource that expanded their value to existing landscaping customers and broadened their customer base.

11. Be “lean and mean.”

Many companies lease their real estate needs, outsource their payroll, have their manufacturing done offshore, or have UPS handle their logistical needs. Since all non-core requirements are done by someone else, the company can focus its efforts on what it does best.

12. Start the process.

While creating business value is critical to the long-term success, many business owners are held back by believing that “I don’t have time now; I’ll do it tomorrow” or “I’m too busy putting out fires.” Consequently, valuable opportunities to build the business and grow its value get sidetracked or put off indefinitely.

Preparing your business for sale is an important part of your business. If you would like to discuss the value of your business, please book a complimentary call with any of our senior M&A Advisors.

*This article originally appeared on IBG Foxfin site.

Types of Potential Buyers

Your buyer may be a similar business. It may be the same size as your company, somewhat larger, or a major industry player. It may be located in your market, or it may be active in a parallel market and interested in expanding by acquisition. It may also be a competitor. To protect you, a business intermediary offers experience and an added layer of insulation when approaching your competition.

The second type of potential buyer is usually a private investor – typically a high net worth individual looking to purchase a project or an income generator for themselves. When dealing with private investors, you will find a business intermediary to be a useful filter; by asking a series of involved questions, they can distinguish buyers who know what they want from pseudo-buyers who are casually browsing the market.

The third (and sometimes the most significant) category of buyer is a “private equity group” (PEG). Often overlooked, PEGs are involved in more than half of the mid-market deals that occur.

What Is a Private Equity Group (PEG)?

Private equity groups are essentially groups of investors who have combined their collective resources, business experience and management skills to form an investment group capable of raising and investing significant sums of money. These groups typically purchase and manage several companies simultaneously. Not surprisingly, PEGs tend to be relatively sophisticated buyers that pose unique challenges to unprepared sellers.

Where Private Equity Groups’ (PEG) Money Comes From

PEG money comes from two chief sources: (1) the member investors and (2) lending agencies, based on the investors’ combined capital and the PEG’s existing investment portfolio.

In some instances, PEGs are publicly traded and draw on the associated funds for their investments. In 2006, U.S.-based PEGs set records when they raised $156 billion in new capital. Recent estimates put the global numbers at $400 billion available for investment; with leverage, that $400 billion could equate to nearly $2 trillion in buying power. While the exponential growth in the private equity market has slowed somewhat in recent months due to turmoil in the financial markets, the long-term outlook continues to be strong.

What Do Private Equity Groups’ (PEG) Buy?

Types of PEG investments vary from group to group. In some cases, PEGs will make acquisitions as part of industry consolidation, commonly referred to as a “rollup”; sometimes they will acquire companies in synergistic purchases; and, in yet other cases, investments are made in order to provide a growing company with growth capital.

Industry Rollups.

Industry rollups involve the acquisition of multiple companies in a certain industry. The acquired companies are then combined or “rolled up” into one master company. This allows significant and rapid growth, potentially profitable expansion across markets, and the creation of a larger market presence virtually overnight.

To illustrate: A PEG owns a $1 million company that it can sell for four times earnings. If the PEG owned a $10 million company, it could sell it for six times earnings. So, in order to maximize profit, if a PEG purchased ten $1 million companies for $40 million, it could combine them and re-sell the new company at six times earnings for $60 million, potentially making the PEG a $20 million profit.

Synergistic Purchases.

Synergistic purchases typically focus on companies offering similar products or services. It may also involve the purchase of a supplier as a way for reducing material costs and assuring sources of supply. In the process, the PEG increases productivity by decreasing overlap and external costs.

Growth Capital.

One of the more diverse types of investments that PEGs make is the investment of growth capital. While typically offered in a number of different forms, its core purpose is to provide a growing company the capital it needs to expand past the “grow-or-go” choke-point. Growth capital investments can include purchasing partial interests as well as complete buyouts. These investments not only free up or provide additional funds for marketing, expansion, research and development; they also can provide skilled management resources, consulting, and increased credibility.

Other Benefits of PEG Deals

From the point of view of a seller, deals involving PEGs typically offer certain benefits that are not as common among other types of buyers.

Professionalism.

Unlike other types of buyers that might be first-time or exploratory investors, PEGs are professional investors focused specifically on making money and closing deals. They don’t require special financing; can be relied upon for a consistent, professional approach; and typically bring extensive expertise to the table. These factors can significantly increase the speed at which deals close and can help to minimize unexpected costs.

Flexibility.

Depending on the business and the PEG’s investment focus, a PEG may execute recapitalization investments; outright purchases; majority share acquisitions, in which the PEG takes over management; or minority investments, where the PEG invests but looks to the seller to continue to run the business.

Closing Thoughts

PEGs look at each purchase as a piece of a bigger picture. As a result, most (but not all) PEGs have exit plans in place prior to the transaction. The typical holding period for most PEGs is between three and seven years.

When dealing with a PEG, the role of the business intermediary takes on greater importance. At Eaton Square, we utilize a database that contains over 4,000 PEGs – each having a unique style, preferred industries, investment requirements, and management footprints.

Due to the sheer number of PEGs out there, it is important that business intermediaries work as matchmakers, not salespeople. A successful deal not only results in the sale of a business, but it also requires chemistry both managerially and ideologically. In addition to our duties as business intermediaries, we balance the playing field and ensure that the seller is fairly represented. Most PEGs have professional buyers on their investment team. The main job of those individuals is to investigate, pursue and negotiate the purchase and sale of portfolio companies. As a result, they are very knowledgeable and skilled at finding and making the best deals possible when it is time to negotiate. Having a seasoned expert as a representative will not only maximize profit, it will avoid costly mistakes and misinformation.

Because virtually any desirable company may become a target for PEG acquisition, business owners who are preparing to sell should be prepared to respond to inquiries from these sophisticated, well-heeled buyers.

If you have questions about private equity groups or potential buyers, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

What’s the true value of your business?

As you consider selling your business, it’s critical to look at its value. But most businesses actually have two values: the “academic” value, determined by a professional business valuation, and the “true market” value. The academic value is arrived at with a formula based on the firms’ tangible assets, cash flow, industry averages and multiples. The fair market value also takes those items into consideration, but then considers what buyers are really willing to pay.

For many small and mid-sized businesses, tangible assets – e.g., equipment, vehicles, real estate and inventory – may be relatively scarce. In some small businesses, there may be no hard assets at all. Instead, their value is based on intangible assets, such as reputation, market share, employees, proprietary processes, customer lists, location and business relationships.

To maximize the fair market value of your business, capitalize on those intangible assets.

Develop Key Employees.

Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success. If you aren’t already doing so, start delegating responsibility to key employees and involve your senior staff members in the decision making process. Demonstrating that your company’s success rests on your team, and not just you, will pay off at the time of sale.

Document What You Do.

Job descriptions, operation processes, and strategic plans should be well documented. Written records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.

Build Relationships.

Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships may be your most valuable commodity. If you’re overly reliant on a one or two suppliers or customers, try to diversify your supplier and customer accounts.
Improve Cash Flows. A prospective buyer wants to see the “true cash flow.” And, of course, in the business world, cash is king. Be sure you are driving all income to the bottom line.

Review Your Assets.

Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.
Find and Build Your Niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.

Remodel, Clean and Organize.

What’s the first thing anyone does when they put their home on the market? They freshen things up and make sure everything is in its right place. It is peculiar that, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.

Keep these important intangible assets in mind if you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, make a plan. Start working on the intangibles well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It’s important to work to keep your focus right until the sale is complete.

Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and an M&A specialist to name a few. Remember, you only have one chance to sell your business, so you want to do it right.

If you would like to learn more about increasing the value of your business, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

Selling his rock quarry was the farthest thing from Norm’s mind.

Starting from a dormant, water-filled pit, five rusty conveyors, and no customers, he had built a highly profitable business that was the crown jewel of the five competing quarries on a rich Illinois limestone lode. He enjoyed the hard work, the satisfaction of business success, close friendships with customers and suppliers, a loyal core of managers and laborers, and the pride of making an impact on the local economy.

And then one September day, an M&A broker with whom he was acquainted called with a message that Norm couldn’t ignore.

“I’ve got a company that wants to buy your quarry,” the broker said. “They want to give you X million dollars – half now, half on a five-year note guaranteed by their Fortune 500 parent company. They want to close by the end of the year, and you won’t need to stay on after the sale.

“I think we can get another couple of million out of them, and if you’re interested I can come up tomorrow and bring the listing agreement.”

Norm said he would call him back. Closing his scale-house office door, he took off his hard hat and started to think.

I’m not going to live forever. My blood pressure’s a little high. My son wants to be a sportswriter. My wife wants to spend more time in Arizona. They’re offering a lot of money. Maybe it’s time to sell.

With no more mental preparation than that (not to mention forfeiting valuable opportunities to maximize his price), he decided to move forward. Thanks in part to his broker’s good work, the quarry sold for $4 million more than the original offer, the deal closed on schedule, and Norm and his wife moved to Scottsdale.

The story should have ended happily there, but it did not. Norm may have been willing to sell – but he wasn’t ready to do nothing.

Two years after he sold out, bored and frustrated by a lack of meaningful activity, he came out of retirement to work his entrepreneurial magic on an abandoned granite crushing operation in Colorado. He failed, losing a lifetime’s worth of accumulated wealth, and the only thing that spared him the humiliation of appearing in bankruptcy court was the heart attack that took his life.

Are You Ready To Sell? Answer These 3 Questions

Norm’s sale and its aftermath illustrate what can happen when a business is ready to sell before the owner is.

For would-be sellers, among the many lessons to be learned from this story is the importance of being personally ready for life without business ownership. Achieving that readiness involves having solid answers to at least three key questions:

1. Why am I selling?
2. What’s next?
3. How do I prepare myself for that?

Whatever your motivation – retirement and liquidity are two common objectives – the answers to those questions help you embark on drafting your personal exit plan. And that plan can provide the structure to transition you, financially and emotionally, from business ownership to whatever is next for you.

“Most owners have a strong personal connection to their company,” notes Jim Afinowich. “It’s not just the source of their income and wealth; it may also be a major source of their identity and purpose.

“That’s why timing is so important in a sale. Three stars have to be in alignment: The business has to be ready; the owner needs to be ready; and the market has to be right.”

Gary Papay, our Principal from North Carolina, also is quick to recognize the emotional attachment of many owners to their businesses and understands why that exists.

“Typically, business owners invest not only a considerable amount of time and money into their business,” Gary notes, “but a good bit of themselves as well. However, the fact is that no one will work forever, as retirement or some other form of separation eventually comes for every business owner.”

Exit Plan

In most cases, personal exit plans are necessary to secure a business owner’s financial future. However, as was described in a recent article by the U.S. Chamber of Commerce (“Ready to Move On? How to Create an Exit Plan for Your Business”), many business owners don’t think, or want, to establish an exit plan until they’re ready to leave – if then.

Whether the delay stems from the owner not wanting to confront their mortality, being better at business planning than personal planning, or simply not knowing where to start, procrastination has real consequences.

“Leaving your business can be emotional and overwhelming,” the Chamber article notes,” and planning a proper exit strategy requires diligence in time and care.”

Key Questions

To provide a well-lit path for would-be business sellers in drafting a personal exit strategy, Gary Papay developed a “Financial Independence Quiz” – a simple list of questions that have helped many of our clients overcome their planning inertia and begin preparing themselves for life after business ownership.

Our quiz includes a number of questions that focus on the owner’s personal expectations and needs, including:

1. Why are you considering selling?
2. If you received your “ideal” purchase price offer from your “ideal” buyer, would you sell today?
3. If the answer is no, why not?
4. How long do you want to stay actively involved in your business? If you reduce your involvement, will that also reduce your desire to own it?
5. If you sell, are you interested in staying on for a while?
6. How much do you spend in a typical year to support your style of living?
7. How much more would you like to spend to support your “ideal” lifestyle?
8. What do you think your business is worth on the market?
9. If you received that amount for your business today and combined the proceeds with your other income-producing assets, would you have enough to comfortably support your ideal lifestyle indefinitely?
10. Can you survive emotionally without your business?
11. Can you envision a meaningful and personally fulfilling life if you no longer own your own business?
12. Can you name three to five significant, ongoing activities or interests that you would pursue after the sale?
13. Have you had meaningful discussions with your spouse about an exit from your business?
14. Do you have a departure date in mind?

A New Season

In reflecting on our 1,100-plus successful closings and examining his pending deals, IBG co-founder and Tulsa Principal John Johnson says that there is a defining point in most transactions – an ah-ha moment – at which the selling owner comes to grips with the positive realities of transitioning to their new season of life.

“Once an owner works through the emotional and identity issues of business ownership,” John Johnson observes, “they begin to recognize that selling is their key to seizing new control, over time, attention and energy – perhaps en route to new opportunities and a life of fulfillment that is free of the consuming constraints of ownership.”

Helping business owners achieve freedom as a reward for their years of successful ownership is a key part of our mission. Whether or not your company is ready for sale, you can look to our experienced M&A advisors to guide you through a valuable, no-obligation process of exit-planning your life to follow a successful sale of your business.

If you have questions about succession or selling your business, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

If you own a business and have children, you may have already begun weighing your options regarding your company’s future ownership. Will you sell it to a third party, or do you want it to remain a family business?

For the purpose of this article, we will assume that:

• you want to keep your business in the family;
• you have multiple children; and
• at least one of them is a good candidate to succeed you in running the business.

If that describes your situation, read on. We will examine a number of important questions and challenges that, effectively addressed, can either provide a roadmap for your successful transition of ownership to the next generation, or show you a different destination altogether.

Steps To Plan For Your Intrafamily Transition

“Successfully transferring business ownership to your children takes more than a little thought and planning,” notes an America Express Kabbage article, Transferring Business Ownership to Your Kids. “Done right, it can ensure income, security and a chance to make a difference for the next generation. Done wrong, it can lose both the business and good relationships between your kids.”

Here are some fundamental steps to plan for your intrafamily transition:

1. Estimate the amount of assets or income you and your spouse need to secure your financial independence after you no longer own the company.
2. Determine whether and how the company can generate enough revenue to support your needs and the needs of your successor(s).
3. Pick an exit date – even a tentative target – for planning purposes.
4. As soon as you see the need, consult with a professional advisor; the right attorney, accountant, or financial advisors can inject insight and objectivity into your planning process.
5. Determine a realistic business value. If you are going to sell the business to your kids, offering a discount is fine – as long as you have a reliable and (for tax purposes) defendable starting value.
6. When the time is right (sooner than later), include your kids in the discussion.
7. Determine the best way to transfer the business to your kids (see a helpful Merrill article, “Smart Ways to Transfer the Family Business,” for potential options)
8. Know which of your children should own your business and which should run your business.

Confronting those last considerations – ownership, management and, inevitably, money – is where many intra-family transfers come off of the rails, and it is on that issue that we will focus on the remainder of this article.

Planning for a Company’s Transition

Consider the example of Austin, whose trucking company, in a typical year, generates net income of about $3 million. Austin and his wife have three adult children: Kevin, a video game developer; Jennifer, a college professor; and Mike, who went to work for his dad right out of college, has performed well for 15 years at every level and is Austin’s heir apparent.

Thoughts of slowing down and ultimately retiring caused Austin to begin planning for the company’s transition. With the best of intentions, he convened a family meeting and laid out his plan for transferring to his three kids the company that comprises the lion’s share of his substantial estate (and their inheritance).

Austin’s plan: The kids would form and own equal interests in an LLC, of which Mike would be the managing member. Austin would convey to the kids’ LLC his ownership in the trucking company, in exchange for a $7 million note that would be paid over 10 years in equal monthly payments. Annual profits would be divided equally among the three kids. Mike would run the company.

The kids’ response: At first, crickets. Then …

• Mike: How much am I going to be paid?
• Kevin: How do we know that $7 million is a fair price?
• Jennifer: What if the company can’t make the payments? Are you going to foreclose on us?
• Mike: I’ve worked hard for the company for 15 years. Doesn’t sweat equity entitle me to more than a third ownership?
• Kevin: Mike’s going to want the company to keep as much of the profits as possible. How are we going to get our share?
• Mike: Do I have to take orders from Kevin and Jennifer?
• Jennifer: This is our inheritance. When are we going to get our money? Can I find a buyer for my share of the company? What’s my share going to be worth?

… and so on.

Strategic Questions To Ask

A Forbes article, “Business Transition Planning: How To Leave Your Company To Your Children,” poses a number of questions intended to head off unintended consequences such as those encountered by Austin, including:

• To which kids and in what percentages do I want to transfer my interests?
• How much of the business do I want to transfer now?
• Do I transfer it to all of my kids, or just to the ones who are actively working in the business?
• If not all of the kids are to receive a share, are the non-participating children somehow “made whole” with some other gifts or arrangements?
• If the parent wants to benefit all children but not all are involved in the business, should some distinction between voting and non-voting shares be considered, or some different classes of shares?
• If ownership is going to be vested equally among the children, how will the involved child be compensated (through income and appreciation) to keep him or her motivated to run the business?

How do you handle multiple children’s money needs and expectations? The business may be profitable enough to support your family, but can it also support the families of all of your kids? How do you fairly distribute profits while taking care of the child who is running the company and actually generating those profits?

If the makeup of your estate allows such flexibility, the best plan may be to transfer the business only to the child who takes over leadership, and equitably leave non-business assets to the other children.

Whatever your approach, the complexities noted in this article should at least help you recognize the challenges for which you need to be prepared. It should also help you discern whether keeping the business in the family is truly a viable option, or selling it to a third party is the more realistic course.

If you have questions about the succession or selling your business, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

Attracting interest from more than one candidate not only generates multiple offers and shifts the leverage to you; it can also reveal your “best fit” buyer.

How you arrive at a market value for a company is an interesting topic. Most sellers believe they know what their company is worth, and usually, they’re wrong. The market is what actually determines the market value.

We can look at it and give them a range of price, a range of value, but you’re not going to know for sure until you have multiple offers for a company.

Preparing Your Company for Sale

Basically, a company is worth some multiple of its earnings. In the simplest form, you have some multiple of your earnings that a buyer is going to look at and say, “This is how much money I’m going to make in the future if I own this, and here’s the rate of return that need to get on my money, and so, therefore, this is what I’m willing to pay for it.”

We get top dollar for a company by first planning in advance. Ideally, I like to talk to potential sellers two to three years before we’re going to market, to prepare the company for sale. It’s kind of like selling a house; you put a fresh coat of paint on it before you put it on the market. So we want to do that with the business. Then when the business is prepared for sale, you run an auction process; you get multiple buyers, and you make sure that they know there’s competition and that they’re going to have to pay what the market will bear at the far end if they’re going to be the winning bidder.

Creating an Auction Environment

We have a saying: “One buyer is no buyer.” If a potential buyer is the only horse in the race, that gives him power and leverage over the seller.

As we discussed before, when you go to market without a price – which is our approach – it is very important to create an auction. To create an auction environment, we start out with good research, identifying a good selection of potential buyers – maybe a good synergistic buyer, maybe a financial buyer, maybe an industry buyer.

Attracting interest from more than one candidate not only generates multiple offers and shifts the leverage to you; it can also reveal your “best fit” buyer – someone who, in addition to offering an attractive price and favorable terms, appears to share your values and seems likely to take good care of your company and its customers and employees. Ultimately, this helps price your business higher.

When you run an auction, it’s kind of like running a horse race where you want all of the horses to end up at the finish line at the same time. We try to enforce very rigid rules; we have schedules and deadlines that buyers have to meet so that they know that they are in a race, there are other people next to them, and they had better give it their all if they want to get be the first to reach the finish line – even if it means paying more than they originally intended.

If you have questions about the price of your business, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

If you receive a phone call from a potential buyer, how should you respond? What do you do if he makes an offer?

We are in a seller’s market, and there are a lot of buyers chasing deals. Good businesses get calls from buyers regularly, and owners are often tempted to try and work that deal themselves, because they think they have a good buyer, and the price seems right.

However, in the end, the owner has a better chance of actually getting a deal done if they have selected an M&A intermediary to represent them. As M&A professionals, we know where the potential landmines are in the process – and there are a lot of them. Whenever you step on a landmine, or even brush up against it, because of your lack of familiarity with the process, one of two things is likely to happen:

• your deal may fall apart, or
• you may still get the deal done, but you’re going to leave money on the table and not know it.

One Buyer, Is No Buyer

If a potential buyer is the only horse in the race, that gives him power and leverage over the seller.

We work very hard to create competition for the business. People want to buy what’s hard to get; if they know they’re competing with someone else for the business, they’re liable to pay a lot more than they – or you – ever expected.

When you go to market without a price – which is our approach – it is very important to create an auction. To create an auction environment, we start out with good research, identifying the potential buyers – maybe a good synergistic buyer, maybe a financial buyer, maybe an industry buyer.

But until you have a full market scan and go to every potential type of buyer, you’re not going to have a good field of horses to start the race. When you run an auction, it’s kind of like running a horse race where you want all of the horses to end up at the finish line at the same time. So you start out with the right field of buyers; you do a very timed process, just like a horse race, that starts at a certain time.

Each buyer starts at a different pace, and each of them runs at a different pace. Again, our goal is to get them all to the finish line at the same time. So the timing of the process – when you go to which buyer – is important. We try to enforce very rigid rules; we have schedules and deadlines that buyers have to meet so that they know that they are in a race, there are other people next to them, and they had better give it their all if they want to get be the first to reach the finish line – even if it means paying top dollar, and far more than they originally intended.

Higher Price, Different Buyer

Several years ago, a gentleman called me on a Wednesday and said, “My lawyer said I should call you. I’m about to sign a letter of intent. A buyer contacted me directly about my business, we’ve negotiated for the last eight months, and he’s agreed to pay $6 million for it, but my attorney said I should talk to you before I sign the letter of intent.”

I said, “Fine, call the buyer, tell them this is the largest transaction of your life, and you want to be professionally represented. Give them my name and tell them I’ll call them in a couple of weeks, when I have my arms around the deal.”

The seller said, “Well, we can’t wait a couple of weeks – the letter of intent expires on Monday.”

I said, “It will wait. Trust me – I’ve done this before.”

He called the buyer and delivered the message, and the buyer said, “No! We don’t want a broker getting in the middle of this. We’ve spent eight months putting this together – please don’t get a broker involved.”

The next day, the buyer called him back and said, “If you leave the broker out of this – because brokers just delay things – it’s going to take forever. Leave the broker out of it, and I’ll give you $8 million instead of six million.”

But the seller stuck to his guns and insisted on using us. He became a client, and we ended up selling the business – not to that buyer, but to another buyer – for $10 million.

That’s a real-life example of how being represented, and attracting competition, is going to maximize your price.

If you have questions about your valuation or would like to find more buyers for your business, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

Keeping The Sale Process Confidential

One of the biggest concerns – and a valid concern – that is most common among sellers of a business is confidentiality. They do not want their employees knowing they’re selling their business, they don’t want their competitors knowing, they don’t want their customers knowing.

In selling your business, using an outside party gives you some space in the market and a buffer to maintain your confidentiality.

When we market a business, we never identify that business or where it is. We may say a “widget company in the southern part of the United States.” When our buyers respond to our general or blind profile, they sign a confidentiality agreement. Then they go through a screening process.

If an owner is selling a business by himself, it’s hard to maintain confidentiality when your buyer is calling you. They know your name, they can look you up, they can see who you are.

Having an intermediary – an experienced layer of protection between you and the market – helps maintain confidentiality and prevent uncertainty that can hurt your bottom line and put your sale, not to mention your profitability, in jeopardy.

What’s likely to happen if people find out your business is up for sale?

Employees Get Nervous.

They worry that they will lose their jobs or that they won’t get along with a new owner. Some employees – perhaps your best ones – may even quit before you have a chance to reassure them. Losing key people is serious, particularly during the sale process. Key staff members provide valuable continuity and business knowledge that buyers are looking for. Lose them, and potential buyers may be lost too.

Customers Begin to Wonder.

They may assume that your business has problems that could threaten their supply chain. They may worry that they won’t get the same quality of product or service from the new owner.

Competitors Will Spread the Word.

Once the competition finds out, they’ll tell your customers and use it as leverage to bring that business to their company. It opens the door for them to steal business from you.

Vendors and Creditors May Tighten Terms.

You may be working with terms of net 45 or more to benefit your own cash flow. But once creditors learn that your company is in play, you may find those terms tightening or notes called due.

On average, a business sale takes nine months to one year. If even just a few of these changes occur early on, the impact can be dramatic. You’re not only running a business; you’re a fireman, busy putting out fires.

A buyer wants a successful operation with few changes until he or she can make them. Too many question marks mean greater risk and lower offers.

Partner with an M&A Professional

Your M&A intermediary can screen inquiries to ensure that competitors aren’t fishing for details. The intermediary should share your identity only after concluding that a potential buyer is qualified and serious. Such prospective buyers should also be required to sign a binding confidentiality agreement that holds them accountable for any leaked information.

You want to maintain your business as usual for as long as possible. Keeping the sale confidential until the right time will help you reduce uncertainty and maximize the ultimate selling price.

If you have questions and would like to discuss your strategy, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

Involving an M&A professional to represent the seller is good for both sides. Sophisticated buyers know that going in, and successful sellers learn that, to their lasting benefit, on the way to the finish line.

In today’s market, 70% of buyers are financial buyers – family offices, private equity groups, or perhaps synergistic buyers. They are professionals, and buying businesses is what they do for a living. They like to have someone on the other side who can package the information as they want to see it, who knows the process, who can guide the seller through it.

From the perspective of an experienced buyer, having an M&A professional involved in the deal on the seller’s side actually:

• speeds up the process, and
• increases the chances for a successful closing.

Buyers Are Willing To Pay Premium to Guarantee a Successful Deal

We recently closed a deal in which a large company bought a business through us. Six months later the buyer came back to us and said, “Here’s another company we want to buy. We’ve signed a letter of intent with the seller, and we want you to represent them.”

We pointed out to the buyer what they already knew: If we represent the seller, our job is to get as much money out of the buyer as we possibly can.

The buyer’s reply: “We really want this company, and without professional help, we will not get a deal done.”

So, at the buyer’s request, the seller hired us. We ended up selling the business, to that buyer, for almost double the price to which they had originally agreed.

But the buyer was willing to pay the extra amount, which included our fees, as a premium for the relative certainty of closing the deal.

The buyer’s willingness to pay that premium should not come as a total surprise. The purchase of an attractive business requires substantial commitments of time, energy, and money – on both sides – and neither buyer nor seller will devote their maximum effort if they foresee too many issues on the other side that could cause the deal to fall apart.

From the buyer’s viewpoint, they appreciate knowing that:

• the company has been professionally valued and critically assessed by an experienced third party;
• the M&A intermediary can keep the seller grounded in the realities of a complex deal, the timeline (see a simplified sample below), the exchanges of information, the bothersome minutiae of due diligence, and more;
• the seller has someone on their side who can hold their hand and keep them committed to the deal when the going gets tough (as it invariably does);
• the seller has someone on their side who speaks the buyer’s language and can look at the deal through the buyer’s eyes (while retaining their commitment to the seller’s interests); and
• the seller’s M&A professional will see the deal through to a successful closing and help ensure that the post-closing process – including the transition of ownership – is completed.

Involving an M&A professional to represent the seller is good for both sides. Sophisticated buyers know that going in, and successful sellers learn that, to their lasting benefit, on the way to the finish line.

*This article originally appeared in IBG Foxfin site.

Level Playing Field