By Stephen Perry, an EO Orange County member and Managing Director at Janes Capital Partners
Selling a business can be a difficult and tricky pursuit with many sand traps for the seller. And not all sellers engage investment bankers. Ironically, those who don’t are usually the ones who need assistance the most. As the managing director of an investment banking firm, I often hear horror stories from owners who tried to sell a business on their own or with the wrong advisor and, for one reason or another, ended up with a failed process. After completing more than 50 deals with a combined value of approximately US$5 billion, I’ve learned some vital lessons along the way.
Don’t wait too long to sell. Entrepreneurial sellers strive to grow their Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)—a commonly applied valuation—as much as possible before preparing to sell their business. But the longer they wait, the greater the risk that some unexpected bad outcome or external event renders the business less valuable or unsalable. In my 25 years of investment banking and corporate finance, I’ve learned that you have to leave some runway for the buyer. Economic conditions, tax law changes, government and regulatory measures, competitor actions, lawsuits, etc. can be highly problematic, especially if you wait to the last minute.
Hire a strong management team in advance. As the seller, it’s imperative that you demonstrate that there’s a strong, loyal and motivated management team in place that transcends whatever you may do, post transaction. In my experience, the stronger your management team, the greater level of success and ease when it comes time to selling. Any staff deficiencies or vacant key management positions will likely result in diminished value.
Emphasize your quality of sales. In an entrepreneur’s mind, any marginal sales dollar is beneficial; however, buyers don’t necessarily see it the same way. Concerns arise as to seasonality, cyclicality, growth trends, month-to-month and year-to-year variations, customer concentration, pricing power, gross margin trends, total available market size, etc. Any proportion of sales to an industry that’s deemed “non-core” will be discounted and deemed unattractive to a given buyer.
Ensure that your financial records are in order. In connection with a business sale, a seller typically represents that his or her financial statements are prepared in compliance with Generally Accepted Accounting Principles (GAAP). Maintaining sound financial records entails the following: having a strong controller (for smaller companies) or CFO (for larger companies); fully utilizing a state- of-the-art financial software package/ERP system; developing financial forecasts (i.e., a 12-month budget and a three-year annual projection); understanding gross margins by customer or product and service line; maintaining a strong cash management system and cash position, along with back-up lines of credit (if a buyer senses cash constraints, the valuation tends to drop significantly); employing a strong external accounting and tax advisor to navigate the complexities involved; and developing an accounting policies and controls manual. These are a few key things to consider.
Seek out niche opportunities, market differentiation and strategic significance. Differentiation is the cornerstone of revenue growth and high-sustaining profit margins, both of which matter greatly to a buyer. “Me too” companies are generally not highly sought after, and when they do transact, they tend to do so at lower multiples. It is also important to achieve “strategic” differentiation. Put simply, this is gaining a position in a market niche that is deemed of strategic interest. For example, an entrepreneur would buy US$1 for the price of 80 cents any day of the week. Larger strategic buyers, however, tend to do the opposite. They are more prone to buy US$1 for US$1.20 or more, if they determine that this supports their overall corporate development strategy.
Unfortunately, there is no official rule book when it comes to selling your business. However, an expert advisor can help you sell your business successfully so that you can move on to your next entrepreneurial destination.
Stephen Perry is a co-founder and managing director at Janes Capital Partners, where he specializes in mergers, acquisitions and corporate divestitures. Fun fact: When not working, Stephen reaches new pinnacles of success by climbing mountains. Contact Stephen at [email protected].