Common misconceptions about selling a business

 

[Editor's note: We have helped over 40 clients add value, prepare for a sales transaction, and execute successful transactions, ranging from $6MM to $350MM. Several business owners have asked us about this topic so we decided to publish this article again. - DPM]  Common misconceptions about selling a business    It appears that we may be entering the next big surge in business transition activity fueled not only by the retirement needs of aging baby boomers, but also very successfukl growth for businesses over the last decade. The first baby boomers turned 75 years of age in 2020 and we are have entered the years with greatest numbers of boomers.   If you are a business owner contemplating a sale somewhere in your future, consider these common misconceptions about selling your business.    ·     I know the buyer - they are in my industry.  Many business owners think they already know the prospective buyers - from their industry. However, in many cases where a sales process is conducted by an investment banker, an "outlier" (either a strategic or financial buyer) surfaces with an offer significantly higher than from those you may know. Many times these come from outside your industry.  ·     The market will be better next year.  Procrastination can cost you. Sellers in 1999 or 2007 or 202 0 will tell you that they wished they had sold while the market was hot.  ·     I don't want to sell until I have to (Dismal D's). You want to sell when your business is healthy and when you don't have to sell. Life can take cruel twists and turns. Business owners without a plan can find themselves subject to the "Dismal D's" - Death, Disability, Divorce, Dissenting Owners, Declining market, Debt overload, or just pure burnout. It is hard work to sell your business. You'll need plenty of energy and motivation to maintain performance during the sales process.  ·     The investment banker or M and A firm will build value.  No they won't - that's not their job! A good investment banker can help you yield value, attract a broader market of potential buyers and get a deal closed, but they don't have the skills or background to build value. Some small M and A firms will offer services and advice in order to get your transactional business, but these are either young, inexperienced associates or people who have not really run a business. They are very good at selling your business, but what they don't know can hurt you. Beware of these firms that pitch themselves as one-stop shops.  ·     My lawyer (or CPA) (or Wealth Manager) will help me find a buyer. Finding a buyer is very different than finding the best buyer, the right buyer. Investment bankers do this every day. Most professionals understand what they do well....and what they don't. Find the right tool for the job!  ·     I met a guy in my CEO peer group /My investors know a banking firm. Selling your business may be your most important business decision. Get help in making an informed decision about selecting an investment banker or other professionals such as accountants, tax counsel, and transaction attorneys. Learn about possible (but undisclosed) conflicts of interest, differences between firms, level of expertise that will work on your company, etc. Have you checked with previous clients that were both successful and unsuccessful? Mead Consulting clients use a checklist of questions to help make the appropriate choice.  ·     It only takes 6-12 months to exit a business. Nothing could be further from the truth. In order to realize the maximum value it may take you 1-2 years to prepare the business, 12 months to do the transaction, and then you may have to remain for up to 3 more years with the company after the sale. Rushing a company to market without proper preparation will cost you as buyers will discount values for companies without an adequate strategic growth plan, diverse customer base, strong management, or a clean review of due diligence issues.  ·      Selling will only take some of my time. The biggest mistake business owners can make is to allow business performance to slip during a sales process. The primary reason for deals to either fall apart - or become heavily discounted - is because of deterioration of revenue and earnings. Business owners can dramatically underestimate the amount of time and energy it will take to both sell the business and maintain performance during the process. The Mead Consulting Group helps business owners navigate through a successful sales process, including preparation, selection of the team (investment bankers, transaction attorneys, tax counsel, etc.), and the sale process itself. We focus on maximizing value and leverage the business owner's and management's time so that they can focus on maintaining business performance. Contact us for more information.      Best regards, Dave Mead

"I can't change the direction of the wind, but I can adjust my sails to always reach my destination."   _________    The future has never been more uncertain, but your business can always be prepared with flexible approaches to planning and execution ________       How is your Execution in 2022 ?  Is It Time to Make Adjustments for 2022?    __________________   Several of our clients had successful sales of their companies in 2021    Prepare to Maximize the Value of your business  Before you go to see the investment banker, take the five steps to maximize value  Contact us for more information       ___________________

 

Don't miss the opportunity to sell during this Upcycle

[Editor's Note: This article is an update of one we have published twice before over the last 20 years. The message remains relevant to the CEOs and owners of lower middle market businesses. I hope you find it useful. - dpm]

We missed the selling boom during the last positive cycle and were determined that we would not miss another opportunity.

In one of our Breakfast briefing series a few years ago, Dan McCallin former owner and CEO of Timberline Steel made an interesting statement: "We missed the selling boom during the last positive cycle and were determined that we would not miss another opportunity to sell during the next upcycle. We decided to take the steps so that we were prepared." While Dan originally made that statement during the recession of 2002, and later sold the business in early 2006, the message could certainly apply today.

The exit sales process may take the better part of a decade. With interest rates near record lows, the economy still in expansion mode, and sales multiples at high levels, there may be a tendency on the part of business owners to think that the good times will continue for the foreseeable future. While some business owners may believe they can pull the string when they are ready, the truth is, for many business owners, the exit sales cycle may take several years to execute. Professionals will tell you that in order to sell at highest value, the process includes 1-3 years to get ready, 1 year or so for the transaction, and then you may have to spend up to 3 years with the company after the sale.

Companies can focus on making fundamental improvements to their business that will help them make their company healthier and more attractive than their competitors.
1. Focus on customer net profitability
2. Upgrade management
3. Cleanup business processes
4. Develop a strategic growth and execution plan
5. Position the company to succeed in any part of the business cycle

Focus on customer net profitability. The tendency is to cling to any customers and revenue no matter the profitability level. A common comment is that "at least they absorb overhead." The notion of unprofitable business absorbing overhead may be one of the greatest false beliefs in business. In many cases, overhead that has been viewed as fixed is really a cost that can be minimized or shed. Carrying unprofitable business will be a continuing cash drain that may inhibit your business' ability to grow as the economy improves.

Upgrade management. There is still a pretty good supply of good talent now available in the marketplace. In many cases this may be talent that may not be available as the labor market continues to tighten. Take advantage of the opportunity to improve. Similarly, this is a great opportunity to review all of your employees and weed out those with below average performance, poor potential, or unrealized potential. Our clients use a simple tool to rank all employees in terms of potential and performance - the results make it very clear which ones have been a drag on the company.

Cleanup business processes. During boom times, many companies claim they are too busy to scrutinize business processes to make improvements and to streamline in order to increase throughput. That "excuse" can ultimately cost you when you try to sell.

Develop a strategic growth and execution plan. You need a plan that will allow you to be agile enough to take advantage of opportunities in the marketplace. There may be market segments that have been slow to come back; some may never come back the same way. Other market segments, however, may present huge new opportunities. Your organization needs to develop a plan and be prepared to execute.

Never waste the opportunity to improve. Take the opportunity to examine everything, reduce unnecessary expenses, trim those underperformers, examine unprofitable business, streamline business processes, etc.

   

Take a lesson from the Boy Scouts: Be prepared. These steps can add value to your business. Your business can accelerate faster and be well- positioned to succeed in any market. The market for selling a business will likely continue to be ripe through most of 2018. Those businesses that are prepared and ready are finding a hungry group of buyers and investors with lots of "dry powder" that they need to invest.

The Mead Consulting Group has been helping middle market companies for over 25 years to add value and prepare for a successful transition. Our clients have consistently enjoyed better results. Investment bankers have told us that our clients are among th

Selling your company? How to prevent your sales transaction from falling apart

Selling your company? How to prevent your sales transaction from falling apart? 

Chances are, if you are a business owner, you have never tried to sell a business. Most business owners sell their business only once. However, those who are in the merger and acquisitions business know the answer to this question - everyone has had a transaction fall apart. Sometimes it's for good reason. But many times, a delayed, discounted, or dead transaction is very preventable with better seller preparation.

Has any of the following happened to your transactions?

1.        Unrealistic (or changing) seller expectations of valuation. Many times sellers do not have an understanding of how valuations are determined. Some look at sales of public companies many times larger than their company; others may receive information from a peer in a different industry; yet others look at revenue without consideration to EBITDA. A few are “sold” by representatives that promise them high valuations in order to secure their business. Going into a transaction with an unrealistic expectation of valuation is a recipe for disappointment, equivocation, and failure.

2.     Cold feet - Seller, especially business owner, is not emotionally prepared to sell. Having sold a number of businesses,    including being involved with six that I either started or ran, I understand how difficult a decision to sell can be. You’ve built this business, struggled and toiled alongside loyal employees, investors, and managers – spent more time on the business than with your family. And now, the decision to sell? Many business owners do not have a post-sale plan and can be very apprehensive about “what’s next?” It is not unusual for a business owner who is not emotionally prepared to sell, to change his or her mind in the middle – or towards the end – of the sales process, incurring significant costs, stress, and ill-will.

3.       Selling company's performance deteriorates during the sales process. Without a doubt, performance erosion during the sales process is the single greatest reason for price adjustments (discounts) or deals falling apart. As a CEO or business owner, selling your business is like adding another full-time job. First-time seller business owners always underestimate the time and energy required to both sell the business as well as maintain the performance “promised” to prospective buyers in your plan.

4.       "Stuff happens" - Surprises show up during due diligence. Many business owners have developed customer and supplier relationships on a handshake or fairly informally. While these relationships may have existed for years, you can’t sell a business without documentation. Sales and supplier contracts must be in place, Intellectual property protected, key employees retained, shareholder and legal entity information buttoned-up, etc. Surprises that show up during the process can cause – at best- large amounts of the seller proceeds to be placed in escrow. At worst, due diligence surprises result in price discounts, or in the buyer deciding to walk away.

5.       Failure to demonstrate a meaningful strategic growth opportunity to the buyer. Buyers are buying an opportunity to get a return on their investment. They are interested in the future, less about your past. You need to develop and paint a compelling story about the future. A thorough understanding of the opportunities, strategies, possible competitive responses, risks, actions, etc., provide a buyer with enthusiasm about the likelihood of a successful investment.

The business owner seller, while very knowledgeable about their business, has little experience in selling a business. As mentioned, for most sellers, it may occur only once in their lifetimes. As a result, they have a lack of understanding of roles, motives, and behavior of the parties involved with a transaction.

Seller's Advocate.  Mead Consulting performs a role with our clients - as the business owner seller's advocate. Our senior consultants have been through dozens and dozens of transactions as both buyers and sellers. We understand the stress involved for the seller. We help clients prepare for the process by working with them in advance to add value by increasing Revenue and EBITDA, strengthening management, working on pre-due diligence, and developing a compelling strategic growth story. Additionally, we walk the business owner through the process, educating them about various aspects of the transaction and the roles of the players, so that there are fewer surprises for them. We assist them in the selection of the appropriate team for their transaction - investment bankers, lawyers, accountants (especially tax). During the sales process we support the transaction team, leveraging the business owner's time, and making certain that key milestones and steps are completed. We keep the business owner and the management team focused on maintaining company performance. When unexpected issues arise during negotiations, we can be a trusted bridge with the business owners helping them see solutions rather than obstacles.

 Better advisors refer Mead Consulting to prospective sellers as a Seller's Advocate. The better lawyers, accountants, banks and investment banking professionals see the value that a Seller's Advocate can have to make certain that a deal does not fall apart and the seller maximizes value.

Since many business owners may be unfamiliar with a Seller’s Advocate…..See what Business owner sellers say about Mead Consulting in a Seller's Advocate role.

...We really underestimated what the sales process would be like. Mead Consulting worked with us to prepare the company, helped us with our planning and due diligence, management presentation, coached us with presenting, and helped us navigate throughout the process. ...Steve F, CEO, Financial Services Company

...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

...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

 ...Thank you to you and your team for helping us. You have that unique ability to challenge people without coming across as judgmental or critical, and you forced us to look at things differently. We would not have been able to get to the next level without your help...Mike M, President,  Business Services company

...I do not know why anyone would attempt to sell their business without Mead Consulting. 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. Making sure that it was the best deal for me. ...Ron T, CEO, Software Business

For more information on our experience and services, please contact Dave Mead at (303) 660-8135 or meaddp@meadconsultinggroup.com

The Mead Consulting Group helps business owners navigate through a successful sales process, including preparation, selection of the team (investment bankers, transaction attorneys, tax counsel, etc.), and the sale process itself. We focus on maximizing value and leverage the business owner's and management's time so that they can focus on maintaining business performance. Contact us for more information.   

Get your Business Ready Before You Have to Sell

[Editor's note: Last year, six clients of The Mead Consulting Group successfully executed sales with transaction values of between $30M to $200M. We have helped over 30 clients add value, prepare for a sales transaction, and execute successful transactions. A number of economists are predicting that 2013 - 2015 will be the best years to transact a business over the next decade. - DPM]

You're ready. You want to reach for the phone to make that call to the investment banker, M&A adviser, or business broker to sell your company. Stop. Consider if you are really ready. A recent survey of investment bankers indicated that more than half of the companies presented for sale will not result in the seller realizing the desired price. For companies under $30 Million in revenue, over 85% are not ready. In fact, most business owners wait until an unfortunate event - health issue, untimely death, partner dispute, loss of very large customer, burnout, etc. before putting the company on the market.

There are financial, legal, regulatory, and management issues that need to be addressed before the company can be properly marketed. Some relatively short-term actions (120 days to one year) can add significant value to your business and increase your selling price:

1. Do you have a Growth Story? Put some excitement (not hype) into your business plan.

Is your future strategy a mere rehash of what you've done before? If it's not exciting to you, why would it be exciting to a prospective buyer? What would you be doing if you were buying the business? Develop a strategic plan that is realistic and can be executed. Be reasonable with your financial projections, but make a compelling case for the prospective buyer. Remember, that a buyer is interested in the FUTURE opportunities for the business, not your history.

2. Drive value - in the buyer's eyes

Many times what matters to a business owner may not be what drives value in the eyes of the buyer. Adding an acquisition or product line in an unrelated field may be interesting to you, but would not fit within the investment model for a prospective buyer. It is likely better to work on things that will drive additional value to your business than what could best be described as a "distraction."

3.  There are immediate profits hidden in your customer base. Focus on both your most profitable customers and your least profitable ones.

One-third of your customers are unprofitable? Think that isn't so at your company? Data from over a 1800 companies ranging in size from Fortune 500 to small and mid-size companies reveals that on average 30% of a company's customers are unprofitable when all costs related to acquiring and servicing a customer are allocated. These "bottom tier" customers typically lose between 40% to 200% of total company profits. That means that your efforts with profitable customers are constantly diluted by the bottom tier.

Customer profitability can be calculated in most companies using the existing software and information technology. There are proven methods for allocating costs to customers so that a profit per customer profile can be developed. Customers can then be segmented into Tier 1 (high dollar profits), Tier 2 (lower dollar profits or break-even), and Tier 3 (unprofitable). Once identified, actions can be taken with each group.

The thought of taking actions with unprofitable customers makes most business owners and CEOs' knees wobble. Managers initially fear that changes will result in lost customers and lost revenue. That simply is not the case. Companies find that turning unprofitable customers into profitable ones is not as difficult as one might think. Carefully identified and properly implemented changes typically result in very few customer defections. Most customers that like your products and services are not fast to change. Those that do leave actually result in an increase to overall profit. Since valuation of most companies is based on multiples of profit or cash flow, profit is much more important than revenue. A wholesale distribution company with $45 million in revenue found that by implementing relatively simple changes to pricing, packaging, and servicing, it reduced the number of unprofitable customers by 45% in 180 days, adding almost $700,000 annually to the bottom line. At a relatively modest multiple of 3 to 6 times EBITDA, these actions alone could add $2 to $4 million to the selling price.

Expanding business with your most profitable customers is the most direct way to increase revenue and profit. By examining the needs of your most profitable customers, you can unlock ways to develop incremental profitable growth. In difficult economic times, it is far easier to increase revenues with your best customers than it is to find and close new profitable customers. Have you asked your best customers how you can gain more of their business? A manufacturing firm with $100 million in sales learned that by adding project management services for its best three accounts, it was able to add an additional $10 million in revenue and almost $1 million in net profit in the first full year.

4. Are due diligence nightmares hanging over your business? Don't wait until you get ready to sell to clarify potential due diligence issues. Waiting will, at best, delay your sale and may result in a significantly lowered price. At worst, they can kill a deal. According to one Denver transaction attorney, "I have seen sale prices lowered by as much as 60% because of a surprise that comes up during the buyer's due diligence. It is far better for a seller to discover these in advance when they have the time to resolve them. A Denver investment banker recently described this situation: "A buyer almost walked away from a purchase because two weeks before scheduled closing, the seller could not produce the proper documentation on their corporate 'S election.' The seller, in order to get the buyer back to the table, ultimately had to agree to put millions of the selling proceeds into escrow to cover a potential tax liability. All because the seller didn't prepare in advance."

Begin to review such issues as:

·             Business entity organization, structure, and ownership

·             Ownership, protection, and use of Intellectual Property

·             Operating and financing contracts and transactions

·            "Auditable" financial statements 

              (Isolate closely held business expenses)

·             Pending litigation

·             Securities and Tax matters

·             Environmental or Other Regulatory issues

5. Get help selecting a "seller's representative" (investment banker or M&A Advisers).

The Mead Group has been involved with our clients buying and selling businesses in this region for 25 years. We have developed good working relationships with the best in class seller's representatives. We can help you to make an informed, educated decision that could make a significant difference not only in the final price, but also-and more importantly -how much you will be able to put in your pocket after taxes and selling expenses.

Start preparing NOW. It may be a 5 year journey!

The demographics of the "Baby Boomer Business Transition Bubble" make it critical that you begin preparing now so that you can sell in the next few years. Estimates for 2012 indicate that there are between 1.2 -1.5 million business owners in the U.S. (of businesses between $2M to $90M in revenue) that need to sell to provide liquidity for retirement. What most seller representatives do not tell you is that it may take you 5 or more years to leave the business - if you expect to maximize your value. This may include 1-2 years to properly prepare your business for sale, 6 months to one year to sell it, and then you may be asked by the buyer to stay on for 3 -5 years to run it. Financial buyers and many strategic buyers don't know your business as well as you do and frequently require managers to stay on to help run the business.

So, before you make the call to an investment banker to sell your business, take a critical look at your company and its current situation. Will you get the kind of price you want? Are there some short term steps that you can take that will add value? Spending some time improving business operations may enable you to reap real value within a relatively short time.

Contact us if you would like to discuss what the best performing companies are doing?