Entrepreneurs put everything they have into their businesses, both emotionally and financially. Some create their businesses with the intention to sell from day one, while others end up there for a variety of other reasons. Selling can be a challenging and emotional process.
Don Bravaldo, Founder and President of Bravaldo Capital Advisors, helps business owners plan and execute exit plans. He entered this field after serving on the corporate mergers and acquisitions (M&A) side, helping large enterprises with the logistical business details involved in acquiring startups and smaller companies. He observed that smaller companies often didn’t have the resources or knowledge to properly plan for these types of situations.
“I noticed that most of the closely held and family run businesses we met with were not prepared for a sale, and few had professional advisors on their side. As a result, they were leaving a lot of money on the table,” says Bravaldo.
Bravado shares what entrepreneurs considering an eventual sale should be thinking about.
How does the M&A market look today?
We’re at the highest valuation environment that I’ve seen since 2007. That means there’s lots of money chasing deals and there are fewer high quality companies in the market for sale when compared to previous cycles. We’re at the top of the M&A cycle where both strategic industry buyers and private equity buyers are extremely active. Many private owners are unaware of the seller’s market we are in and they are jumping on the first unsolicited offer that comes knocking on their door, but that’s a mistake.
How should the M&A market work?
They need to prepare for a transaction and then create a confidential, competitive, auction style sale process. This will assist to drive up the price and get them the highest valuation for their business.
Companies also need to make sure that a transaction is consummated on terms that are originally offered. One of the oldest tricks in the acquisition book is for a buyer to approach an unprepared seller who is not working with an advisor and offer what seems to be a high initial valuation, but as weeks stretch to months of negotiations, the buyer slowly whittles down the valuation and restructures the proposed terms, ultimately leaving the seller to have to make a hard choice – accept the lower price and changed terms, or walk away with nothing to show for their efforts but lost time and high professional fees.
What would you say to business owners who are thinking about selling their business down the road?
- Prepare in advance.
Business owners are moving at 100 miles per minute and often lack the time necessary to be proactive. About 80 percent of our clients are event-driven, coming to us after what we like to call one of the 3 D’s – death (realization of mortality), divorce, or discouragement. We prefer the 20 percent that are planners and are looking at a runway of around 3-5 years to begin a multi-year planning process to exit their businesses on their terms.
Start first by asking yourself, “what is the true value of my business?” A lot of business owners aspire to sell to a public company (public companies typically pay more), but don’t understand the value drivers that buyers in today’s market are looking for. Upgrade the quality of your financials and get outside assurance on your numbers — you may think you run a good ship, but a potential buyer isn’t just going to take your word for it.
- Document historical and future performance.
A potential buyer, bank, or investor will want to see two things: where your business has been and where it’s going. If you’re not already documenting the historical performance of your company, start now. Document how your company generates revenue streams as well as the margins by product and service line — documentation from the past five years will be requested during transaction due diligence.
Improve your forecasting ability by implementing annual budgeting and documenting your sales pipeline. A company that has a long track record of hitting their projections has a much stronger case to make to a potential buyer. A buyer is paying for historical performance, but also for future business — so have a three to five year forecast. You need vast amounts of documentation to prove your value: a pipeline, sales funnel, your conversion rates, past forecasts and how you met those expectations, and more.
- Mitigate your risk.
The more you can eliminate risk, the higher the value of your business and the more transferable it becomes. Risk can be mitigated in a number of ways, both operationally and financially. Let’s say, for example, you have a customer that represents a large percentage of your revenues and profits. Mitigate the risk of that customer leaving by securing a long-term contract.
- Surround yourself with expertise.
Public companies or private equity firms want to get the highest return possible for their shareholders. They are experts at buying, often undergoing multiple acquisitions per year. Great advisors bring leverage and knowledge to the table and when appropriate, introduce competition into an exit/sale process.
What guidance would you give for a business selecting an advisor?
When you’re looking for a high-quality advisor, look for someone with a great reputation. Assess their background, education and experience. Most importantly, make sure they do business the way you want to do business. There are millions of dollars at stake and you’ll want someone with strong integrity and morals. Look for an independent firm that’s willing to fight for their clients.
When should people start working with an advisor?
If you’re thinking about potentially exiting your business in the next 5 years, you should be working with an advisor right now. In fact, you’re already late. We are currently 8 years into this current slow growth U.S. expansionary cycle. U.S. economic expansions have typically lasted approximately 5 years on average since 1854.
If you want to exit your business, you won’t find a better time than right now. Valuations are at all-time highs, financing is readily available and buyers and investors are extremely active. Seek out a high-quality advisor before the current seller’s market conditions change.
Matthew May is the co-founder and managing partner at Acuity.