Most business owners we meet aren’t prepared for a business sale. Most investment bankers and buyers won’t wait for you to get your house in order. Here’s a practical approach to what you can do about it and always be ready.
What Does “Being Ready” Mean?
Being ready requires rigorous preparation to improve both the likelihood of a successful transaction and enterprise value at closing.
Companies maximize value by articulating a well-thought-out growth strategy which highlights opportunities for the buyer to grow and generate a return on their invested capital. Showing “runway” that the business hasn’t peaked out creates multiples and value. This strategy is typically modeled out in a financial forecast that outlines the strategy, the execution steps and resource requirements while tying to historical performance.
Successful companies offer leadership teams that are broad and deep. A management team that is overly dependent on one individual will have the practical impact of reducing the number of prospective participants in a transactional process. Most financial buyers are not interested in or set up to operate businesses they invest in, relying instead on the team in place. This is an avoidable risk by having a team in place that has worked collaboratively for enough time to be cohesive. Such teams command premium valuations.
Finally, the transactional due diligence process is invasive. The general rule of thumb is that a buyer won’t close the deal until they believe they know more about the company than the owner does. Being unprepared to meet the rigorous demand of this portion of the deal process can slow it down or, in extreme instances, put a halt to the transaction.
Why is This Important?
Business sellers should understand the business of investment banking to gain appreciation for how they think about your company.
Investment bankers work for success. As the banker doesn’t get paid the vast majority of their compensation until the transaction closes, any given client must be prepared to go to market to get the banker’s attention. It is not in the banker’s business model to work with a client to ensure that a transaction will successfully complete because it takes away from working with or prospecting for those clients that are ready.
The importance of this, particularly to lower middle market and middle market companies (transaction sizes between $25 million and $500 million), is that most hands-on investment firms don’t have the bandwidth to dive in to make the company either transactable or more valuable.
If the company isn’t prepared to engage a banker, there are several bad outcomes that come from this. First, the advisor may still take on the engagement because it feels there’s still closing to be had so they can get paid. Such opportunities often lead to suboptimal valuations and, importantly, less favorable terms and conditions of the sale. If the banker won’t take the assignment on, there are substantial prospective opportunity cost losses with being unable to transact when the market could have great interest in the company.
Why There is No Substitute for Being Ready
Being ready for a transaction carries several benefits. First, even if there’s no deal on the horizon, companies ready for a transaction operate more efficiently and profitably. Having the discipline on a regular basis of examining performance and growth plans allows tracking and adjusting to changes in the marketplace and internal changes.
Second, qualified and quality buyers may make unsolicited inquiries as to the availability of the company in a sale transaction. Such buyers will not exhibit much interest in negotiating with a company that requests several months to “get the house in order” and will move on to opportunities where such an inquiry will be prospectively transactable.
Third, investment banking advisors will view any prospect to advise a transactional opportunity as “go or no go.” If a company is not ready for a deal, the banker is unlikely to participate in a selection process or, if so, will put it at the lower end of both probability and commitment of resources.
Finally, markets come and go. What’s a hot and valuable industry today will be picked over and worth less tomorrow. If your business is unprepared for the deal, there’s a risk that the market will be missed.