Think Like A Buyer When Selling Your Business [PODCAST]
Duco recently had a chance to visit with Joe Hellman, host of The Transaction Abstract podcast, about why it’s important for a seller to think like a buyer in an M&A transaction. Joe is the M&A Advisory Practice Lead at Redpath and Company CPAs, where they assist clients in preparing for and navigating the complex process of purchasing or selling a company. You can listen to the entire podcast below.
So, Why Should You Think Like A Buyer?
Because that is the person who will decide to purchase your company–or not–and for how much.
Every business owner wants to realize maximum financial gain when it comes time to sell their company. You have to present your business in the best possible light, operationally as well as financially, so the buyer feels comfortable paying top dollar. That might sound relatively simple, but it is not.
There are many factors that go into crafting a successful M&A transaction, and not all of them are tangible. If you can get inside the buyer’s head–see the opportunity from their standpoint–you can proactively address (or head off) their concerns and focus on how purchasing your business will achieve their goals.
Is Your Buyer’s Endgame Strategic or Financial?
Strategic buyers want your company because it will augment their existing operation in some way. You have technology or expertise or other capabilities they need to improve or expand. For them, the purchase is a long-term investment because they are likely looking to integrate it into their existing operations. Some companies frequently do this and inorganic growth is a core part of their strategy, others may have limited experience in completing and integrating acquisitions.
Financial buyers are entities such as private equity funds that are typically looking to make a shorter-term (4-6 year) investment. They believe they can make your pretty successful business even more valuable, then exit to another buyer. That may take a few years, but they typically do not want a long-term commitment. This does not mean that they do not care about the long-term success and health of your company, just that their time horizon is likely shorter and their growth goals may be more aggressive.
Understanding your buyer’s motivation will help you prepare most effectively. Do not assume a strategic acquirer will automatically pay the highest price, simply because they can reap cost synergies post-close – they are not particularly interested in paying you as a seller for the work they have to do to achieve those synergies.
Does the Buyer Constitute a Good New Home for Your Company?
We think the biggest issue some sellers struggle with is accepting the fact that once you sell the business, it’s no longer yours. Even if you are rolling equity along with the new shareholders or you’re looking to stay on after the sale, it’s ultimately up to the new owners to decide on the direction of the business.
So, does your prospective buyer even want you to remain involved? Are you comfortable becoming an employee and reporting to investors and a board? You (and perhaps even some of your current management team) may bring expertise or other major value for a strategic or financial buyer, depending on their goals. But they know that it can be difficult to give up something you spent your entire life building - and that includes decision-making power.
If your goal is to simply walk away, make that clear to your buyer. If you’re considering rolling equity and remaining part of the new enterprise, your buyer has two overarching questions: are you sure that you’re comfortable reporting to them? And, do we want to work with you?
Your clear response to that question makes the whole process a lot smoother. Otherwise, confusion about expectations arises in the middle of the process, the buyer may start rethinking the value side of the deal. Or they may rethink the transaction entirely.
Bring in Your M&A Advisors Early
Talking to people in the M&A industry is helpful. Having as many conversations as possible will help you figure out what you need around you to achieve the deal you want. The right team will help you think through what you really want out of the deal and have the skills to execute on it. There are many different advisors to consider during a sale, but we heavily stress the importance of a good attorney who focuses on M&A activity and has a number of relevant deals closed in the past 1-2 years.
We think business owners tend to underestimate the amount of information you’re going to need to hand over and how intense the process is. Your M&A advisors will help you get organized and advise you on what to show the buyer and when. They will help you get comfortable with all the things a buyer will want to see such as:
Financial details
Any significant customer or industry concentration
Diagrams of your facility and a list of capital equipment
Organization charts
Legal structure
Any pending legal, environmental, compliance, or other issues
Keep Your Foot on the Gas
Do not lose operational focus during the diligence process. This can lead to a downturn in the business. Worst case, the buyer might walk away entirely, or they may want to reduce valuation. Everybody is valuing your company based on future cash flows and the projections you provide. So, if your business suddenly drops 10% for this year because you’re distracted, the growth forecast may remain the same but now valuation is starting from a lower base.
Conversely, do not try to amp up normal business operations or cut costs in the hopes of driving up the price. This is a red flag. The buyer knows they’ll have to reverse changes to accommodate future growth, and it will likely cost more. You can do some house cleaning, but a the time leading up to a sale is not the time to undertake major business changes.
Be clear on what you want from the deal and what the buyer expects. Surround yourself with top-notch M&A advisors (especially a good deal attorney!) and keep your business functioning normally. Those are two keys to closing the deal.
