As an M&A Advisor, I speak daily with business owners contemplating selling their businesses. I am constantly asked why some businesses sell (relatively) quickly at high multiples, while many don’t sell at all.
Well, the secret is that 50-60% of the businesses that I encounter (typically between $1M – $20M annual revenue) are either not currently sellable, or if brought to market, would sell at a price and terms that would be unacceptable to the owners. This is extremely unfortunate, as we are in a thriving M&A market, stocked with a large pool of well-funded individuals, private equity firms and strategic buyers that are facing a shortage of quality companies ready to be sold!
How does a business owner know they are ready to sell quickly at top dollar? Here are the 5 key questions to ask yourself before taking your business to market:
- Do We Have a Recent Track Record of Stable to Increasing Revenue and Profits? – As I’ve highlighted in a previous post, financial buyers typically acquire businesses on the basis of expected future cash flows, and apply industry multiples to determine their offer. Businesses that sell fastest and at the highest multiples tend to have increasing revenue and profits for at least the past three years. If the financial performance is declining, buyers will typically fear the worst and make low-ball offers for what they assume is a distressed business, requiring them to invest significant time and resources to turn the business around. If the business has been underinvested in (e.g. company relies on equipment at the end of useful life), buyers will reduce offers to account for the incremental capital they assume will be required post-closing. If a business is on a financial decline, it may then only appeal to strategic buyers (who seek access to new markets, products or technologies) further limiting the potential buyer pool. If a business owner expects maximum sales price it is imperative that it can demonstrate increasing profits. This will both expand the buyer pool and create competition among buyers, improving price and terms.
- Is the Business Really Anything More than Me? Assuming a company is generating healthy profits, the next reason a company would not be sellable in today’s market would be the fact that the owner acts as a vital technician and not as a manager. For a company to sell at full price, middle management needs to be in place, or currently being groomed to replace the founder. Can the owner go on a two-week vacation and have the business run well in his or her absence? If the answer is yes, your business is very likely to sell quickly for top dollar. Years ago, I advised a business owner that his business wouldn’t be sellable until he was able to take a two-week vacation without it impacting his business. He and his wife just returned from a 3-week Panama Canal cruise and we are currently preparing the business for sale because the business ran successfully in his absence.
- Are My Books Clean? – I’m sure you’ve heard this expression before, but what does it actually mean? It means that financial reports (Profit & Loss statements, Balance Sheets, payroll reports, etc.) can be quickly generated (for any time period), and any trends/variances easily explained. If there are personal expenses in the business, (the norm for almost all businesses I see), buyers will want to see these expenses substantiated with credit card receipts, invoices, etc. If there are excessive personal expenses (e.g. boats, 2nd homes, alimony, etc.), the chances of the buyer getting bank financing are significantly decreased, as these expenses are not ‘adjusted out.’ I recently worked on a deal where the seller claimed they were being paid $3,000 a month in cash from a customer, but was unable to substantiate the cash through invoices or bank deposits. In this instance, the buyer had no choice but to reduce his initial offer, reducing both the purchase price and the seller’s credibility.
- Do I have a Potential ‘Dependency’ Issue? – In M&A jargon, when a business has an over-reliance on a specific customer, customer segment, key supplier or key employee, this is referred to ‘concentration’ and represents a perceived risk to buyers that often results in a discounted offer. The concern is that if the customer, employee or supplier, for one reason or another, doesn’t transition with the deal, then the performance of the business will be significantly negatively impacted. Buyers may also reduce their offers if they perceive over-reliance on a key employee or see excessive turnover in key roles, especially sales roles. Before going to market, we recommended that a business/strategic plan be created to identify such potential dependencies and create mitigation plans for each. We recently completed a strategic plan for an IT services company that created actionable steps to diversify away from customer segments that could be hit hard, if, and when the next recession comes.
- Do I Have Reasonable Expectations Heading Into a Sale Process? This is obviously an all-encompassing and highly subjective question. As the business owner’s advisor, I like to ensure that owner has flexible and reasonable expectations on all of the following:
- Am I realistic on value and terms? – Prior to going to market, I create an ‘Opinion of Value’ that provides my professional assessment of the realistic selling price range and terms in the current market. I analyze comparable transactions in the same industry for similarly sized companies and incorporate the potential perceived buyer risks (e.g. customer concentration, dependency on seller, etc.). I will always provide a price range and do my best to justify the highest end of the range, but if the business is realistically worth $3M, but the seller insists it’s worth $6M, we are unlikely to have a successful outcome.
- Am I willing to offer some seller financing? – All business owners would like to get 100% cash at closing, and we always strive for this. However, I always advise sellers that expecting 10-20% of the consideration in a seller note has many positive benefits, including increasing the buyer pool (by demonstrating confidence in the health of the business) and potential tax savings by taking proceeds over multiple years. When a business owner demands all cash, they are likely reducing their chances of receiving optimal value.
- Am I willing to help transition and sign a 5 Year Non-Compete? – Buyers acquire businesses with the expectation that the current owner will help them transition key accounts, relationships, and employees. Additionally, it’s important to understand that one cannot set up a competing shop after the deal closes. It is reasonable to expect that business owners will stay on for 2-6 months (paid) and agree to not compete for 5 years. If you aren’t willing to accept these conditions, it’s likely a sign that you are not ready to sell.
- Am I willing to commit 6-12 months to this process and keep running the business optimally? – Even under ideal situations with cash buyers acquiring a thriving business, M&A deals take time – generally 6-12 months. Unlike real estate, where the values don’t change dramatically month-to-month, business valuations fluctuate based on a wide variety of conditions. For example, if a company loses a key customer during the week before closing, buyer will likely demand a price reduction. To preserve the maximum selling price, it’s essential that the business continues to perform and re-invest at its historic levels.
- Do I have the right team of advisors in place to help me? One thing will be guaranteed in this process: the deal will invoke a roller coaster of emotions. It’s imperative that you have the right team of advisors around you. This will often include your CPA, corporate attorney, wealth manager and an M&A Advisor, who will quarterback this process for you so you can continue to run your business.
Selling your business is hard work! In order to receive maximum proceeds and the most favorable terms, the business must be able to:
- Clearly demonstrate that it is performing well financially and operationally
- Be structured in a way that it can survive beyond the owner
- Lack any concentration issues
- Be well-positioned for future growth
- Be supported by a team of advisors (M&A Advisor, CPA, Attorneys, Wealth Managers) that are aligned and share a common view of success.
If you have any questions about your company’s readiness to sell, please reach out to me for a confidential discussion. I’d love to learn more about your business and would be happy to share my thoughts.
Kevin Berson is licensed M&A Advisor with Kinected Consulting and is based in Sherman Oaks, CA. He specializes in helping business owners maximize outcomes in selling their businesses. He is also the founder of Kinected, a Management Consulting firm that advises companies with strategic planning, exits planning and merger and acquisition diligence. Kevin can be reached at kevin@kinected.com.
88%
Kinected closes 88% of the transactions we take on — nearly 3× the industry average. If you’re thinking about selling, start with a confidential conversation.
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Kevin Berson
Founder & Managing Partner · Kinected Advisors
Kevin leads sell-side M&A engagements for businesses with $10M–$100M in revenue. He has advised on ~$1B in transactions and can be reached at kevin@kinected.com.