What I Wish I Knew Then About Exiting My Business

Built to Sell: A Roadmap for Middle Market Owners  - A Note from Dave Mead — Mead Consulting Group

[Editor’s Note: After more than 35 years advising middle market owners through some of the most important decisions of their lives, I have sat across the table from hundreds of sellers. I have watched transactions close beautifully — and I have watched them fall apart. I have seen owners walk away with generational wealth and others leave millions on the table through no fault but timing and preparation. What separates them is rarely luck. It is almost always what they did — or didn't do — in the years before the process began. -dpm]

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I Wish I Had Known How Early "Early" Really Is

Every owner I have ever worked with believed they had more time than they did. The strategies that genuinely move the needle on value — tax structures, financial cleanup, owner dependency reduction, customer diversification — all require runway. Not weeks. Years. The owners who started three or more years out executed them fully. The ones who started six months out executed almost none of them.

If I could go back and give one piece of advice to every owner I have worked with, it would be this: the moment you begin to think seriously about selling — even casually, even abstractly — is the moment to pick up the phone. Not because the sale is imminent. Because the preparation is.

I Wish I Had Known That the Sale Price Is Not the Number That Matters

For most of my career I watched owners fixate on the headline number — the enterprise value, the multiple, the top-line figure that gets announced at the closing dinner. What they often didn't focus on until it was too late was what they actually kept. Federal and state taxes, deal structure, the working capital peg, escrow holdbacks, earnout risk — by the time all of it is accounted for, the distance between gross proceeds and net proceeds can be staggering.

The owners who fared best were the ones who engaged a transaction tax advisor early — not their regular CPA, but a specialist who lives in this space — and built a structure designed to protect what they had earned. That work cannot happen at closing. It has to happen years before it.

I Wish I Had Known How Personal It Would Feel

A business sale looks like a financial transaction on paper. In practice, it is one of the most emotionally charged events an owner will ever navigate. The business you built is not just an asset — it is your identity, your daily structure, your professional relationships, and often your deepest sense of purpose. When it transfers to someone else, the absence of all of that can hit in ways that the wire transfer does not fill.

I have seen owners who were fully prepared financially arrive at the other side of a transaction completely unprepared for what came next. The ones who navigated it best had thought carefully — before the deal closed — about what the next chapter would look like. They had a plan for their time, their energy, and their identity that did not depend on the business they had just sold.

I Wish I Had Known to Trust the Process — and the Team

There is a moment in nearly every transaction where the seller wants to take control — to reach out to the buyer directly, to short-circuit the banker's process, to make a handshake deal that feels cleaner than the formal one. I understand the impulse. I have also watched it cost sellers dearly.

The structured, competitive process your investment banker runs exists for one reason: to maximize your outcome. Every shortcut around it reduces competitive tension and hands leverage to the buyer. The right team, running the right process, with the seller focused on keeping the business performing — that combination produces the best results. Every time.

The Conversation I Wish More Owners Had Sooner

The owners I have seen thrive — financially, emotionally, and in the chapter that followed — shared one thing in common. They started the conversation early. Not when the pressure was on, not when health or circumstance forced their hand, but when they still had time to do the work properly.

If any part of this series resonates with you, that conversation is the right next step. It costs nothing and changes everything.

Contact Dave Mead at (303) 660-8135 or meaddp@meadconsultinggroup.com. The conversation is free. The cost of waiting is not.

 

Don't miss another opportunity to sell during the upturn

[Editor's note:  In April 2009, we published this article. Many business owners had missed the window of opportunity to sell during the 2003 -2007 window when selling price multiples were at all-time highs. In 2014-15, we again have market dynamics that mirror 2006-7 - selling price multiples are again at high levels. It is a sellers' market with far more buyers than sellers. How long will this cycle last? . Many economists expect the next downturn as early as 2017. No one knows for sure. However, there is one thing for sure - if you missed the favorable opportunity to sell once, do not let it happen again.       -DPM]

Dan McCallin, former owner and CEO of Commerce City-based Timberline Steel recently made an interesting statement about his company: "We missed the selling boom of the late 1990's 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, it could certainly apply today. 

The full exit sales process may take several years.  With credit markets tight, the economy in recession, and bad news seemingly everywhere, it may seem counter-intuitive to be writing about preparing your company to be ready to sell during the next economic upturn. While some business owners may believe they can pull the string when they are ready, the truth is, for many business owners, it may be exit sales cycle may take several years to execute. Professionals will tell you that in order to sell at highest value, the process includes 1-2 years to get ready, 1 year for the transaction, and then you may have to spend another 3+ years with the company after the sale.

Much of the preparation can be accomplished during the down cycle. Companies can focus on making fundamental improvements to their business during the downturn that will help them emerge faster and healthier 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 for the upturn
6.    Never waste the opportunity of a good downturn

Customer net profitability.
The tendency during a downturn 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 a great supply of good talent now available in the marketplace. In many cases this may be talent that would not be available in better times. 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" typically does not apply during the downturn.

Develop a strategic growth and execution plan. You need a plan not only to help you survive the downturn, but also that will allow you to be agile enough to take advantage of opportunities in the recovering marketplace. There may be market segments that will be 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.

Position your company for the upturn.
The most significant competitive gains are made during a downturn. Companies that are prepared and well-positioned can accelerate very quickly as he markets healthy. Competitors that are under stress during the downturn will actually be under greater stress as the economy improves. Cash demands can be low when demand is low. Cash needs, however, will increase as the economy improves. Companies will need cash to hire more people, invest in inventory and equipment, etc. 

Never waste the opportunity of a good downturn
During downturns, companies have the opportunity to examine everything, reduce unnecessary expenses, trim those under-performers, examine unprofitable business, streamline business processes, etc. 

Take a lesson from the Boy Scouts: Be prepared.
These steps can add value to your business - even during a downturn. When the economy improves, your business can accelerate faster and be well- positioned. The market for selling a business will be ripe in late 2010 and 2011. Those businesses that are ready will find a hungry group of buyers and investors who have been sitting on their hands during the recession.
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What's the old saying - "Miss your chance once, it's a shame; Miss twice, shame on you!"

If you have not yet prepared your company ready for sale, we can help. The Mead Consulting Group has been helping companies prepare to maximize value for exit for many years. We have helped over 50 client companies successfully sell outright or recapitalize their business to take "chips off the table." See what some clients have said about their experience with Mead Consulting.

Prepare your company to be bought

Prepare your company to be bought

[Editor’s Note: 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 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 a 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

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


7.    Build a team of Qualified Advisors
•    Minimize distractions from running your business effectively
•    Get advice from professionals who have expertise in areas you do not and have done it before
•    Beware of advisors that outstep their areas of expertise

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.

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The Mead Consulting Group has helped over 50 clients prepare for successful sales transactions ranging from $15M 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. ...  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