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[Editor's Note 1: There
is currently almost $4 Trillion in Dr Powder in Private Equity firms. While
2023 and 2024 have been slow years for transactions, there is the sense
that once interest rates begin to come down, there will be a flood of
activity as PE firms rush to deploy capital]
Editor's Note 2: Many
business owners fail to prepare their businesses for a sale either because
they believe that a potential sale is far off in the future or because they
are focused on current issues and do not consider preparation to be a
priority. We would submit that companies need to be "prepared to be
bought." Sometimes lucrative offers come unexpectedly for companies
that are well-positioned. We typically recommend that a company engage an
experienced investment banker to assist them in a sale - often even if they
have received an offer - in order to generate a competitive environment.
Some business owners who
have tried to "time the market" at some point off in the future
have found that unpredictable events such as the Covid-19 pandemic,
2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11,
industry issues, etc. can derail their ability to sell at maximum value. We
recommend to our clients to work each year to make certain that their
companies are currently desirable to buyers. - DPM]
How best to position your
company to be attractive to buyers:
1. Demonstrate
Strong Financial Performance
a. Historical Financials
* Consistent
revenue growth (at least upward trend)
* Recurring
revenue is a plus
* Strong
operating margins
* Increasing
profitability
* Importance
of last twelve months
b. Operating Cash Flow
* Focus on
hitting projected revenue and earnings numbers
* Review
net profitability of customers and products
2. Maintain
"clean" financials
a. Audited or
"auditable" Financial Statements
* Have your
financial statements audited with a reputable firm to
add credibility
* Use GAAP
accounting. If not, identify how practices differ from GAAP
* Understand
cash vs. accrual accounting - timing differences can be material
b. Income Statement
Adjustments and "Add-backs"
* Buyers
are skeptical of earnings that rely on substantial add-backs (one-time,
non-recurring charges, private company expenses, etc.)
3. Diversify
your customer & supplier base
* Diversification
signifies a healthy business and reduces risk
* Buyers
will pay less for companies dominated by one or two customers
* Examine
what % of sales your top 10 customers represent?
* How
stable are your top suppliers? How stable are their terms?
* Do you
have multiple suppliers for critical components/services?
* What % of
total purchases does your top supplier represent? Top-5 combined?
* What % of
the company's sales are related to a few key employees?
4. Develop
a Strategic Growth Plan
* Maintain
a clear strategy and be able to demonstrate your history of execution
* Be able
to articulate specific future growth opportunities
* Position
your company to take advantage of them
* Remember: A buyer
needs to see a potential Return on Investment
5. Build a capable
Management Team
* Invest in training
and key strategic hires, if needed
* Motivate
management to add value to the company through a potential sale
* Focus on building a
deep management team that can thrive without your continued leadership
6. Eliminate
potential "Gotchas"(these
are items that could result in significant discounts to value)
* Maintain
legal documentation (licenses, regulatory filings, contracts, intellectual
property, incorporation, etc.)
* Clear
title to all assets
* Document
processes and procedures
* Resolve
legal disputes, environmental issues, etc.
7. Build
a team of Qualified Advisors
* Minimize
distractions from running your business effectively
* Get advice from
professionals who have "done it before" and
who have expertise in areas
you do not
* Beware of
advisors that outstep their areas of expertise and pretend to do it all
Are
you and your company ready if a buyer appeared on the radar?
Most
business owners who have executed a successful sale of their business will
tell you the most important thing is: BE PREPARED.
Selling
a business is very different than operating a business. As a business owner
you know your industry, your product or service, your customers and your
markets. Most business owners will only sell a business once in their
lifetimes - and it can be by far the most important financial transaction
of their lifetime.
________________________________________
The Mead Consulting Group has helped over 70 clients prepare
for successful sales transactions ranging from $10M to $350M in transaction
value. We help companies increase the value of their businesses leading up
to a transaction, minimize the things that cause potential buyers to
discount the price, prepare to best position the company, and assist the
owners in building a transaction team.
What
successful business owners say about us:
...We
could not have completed the sale of our business without the advice and
guidance of The Mead Consulting Group. Their experience was critical in
helping us prepare, and endure, the transaction process to a successful
outcome. ...Charles M, President, Healthcare IT Company
A
successful process is draining and stressful. The Mead Consulting
Group brought the experience and expertise necessary to help our team focus
on the critical issues and not get caught up in the multitude of items that
can derail a transaction. Why reinvent the wheel? We chose to
take advantage of individuals who could help us understand the nuances,
negotiate effectively, and close the deal. ... Ken W, CEO, Behavioral
Healthcare
...We
missed the opportunity to sell our family business during the last upcycle.
Mead Consulting helped us grow revenue and EBITDA to record levels and
guided us through the selection of a transaction team. Dave Mead and his
group provided great counsel throughout the sales process, removing
obstacles and firmly encouraging us to a great deal with a strategic buyer
that mirrored our family business values. ...Dan M, President, Building
Products Company
...I
do not know why anyone would attempt to sell their business without Mead
Consulting. Since they have owned and sold their own businesses, they
understand the challenges of continuing to run the business while trying to
sell it. Their experience kept us focused on the right things and they
helped keep our transaction team well-aligned during the process. They
truly act as the advocate for the CEO and owner, helping to make sure that
it was the best deal for the owner. ...Ron T, CEO, Software Business
For more information on
the process to prepare your business for a successful transaction, please
contact me at meaddp@meadconsultinggroup.com
or (303)660-8135.
____________________
Best regards,
Dave
Mead
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