Tips from 5 M&A professionals for business owners looking to sell

Sunday, 15 March 2015 22:00
Written by Mark Sanchez

Selling a business requires a lot of preparation that many owners don’t always go through prior to pursuing a prospective buyer.

The Business Enterprise Institute estimates that 85 percent of baby boomers who own a business have no exit plan. Four out of 10 businesses listed for sale last year did not find a buyer because of the lack of planning for succession to a new owner, according to the International Business Brokers Association.

MiBiz asked five M&A professionals to share their advice for business owners considering a sale of their business. They included:

• Phil Torrence, Honigman Miller Schwartz and Cohn LLP, Kalamazoo
• Doug Yntema, Altus Group, Grand Rapids
• Max Friar, Calder Capital, Grand Rapids
• Jon Siebers, Smith Haughey Rice and Roegge, Grand Rapids
• Matt Miller, BlueWater Partners, Grand Rapids

Here’s what they had to say.

What’s the best thing an owner can do to position his or her business to sell within the next year or two?

Torrence: Two things I always tell clients: One, don’t run your business specifically for the purpose of selling it. You ought to run it as if you may not sell it because you may not get what you want. People tend to take their foot off of the gas pedal when they think there’s a liquidity event around the corner.

Two, and this may be a little bit in contradiction to that: You need to be extra-ordinarily prepared for the process. I highly recommend an investment banker be retained to start that process. If you want the highest dollar for your particular business, going through the ropes of what a buyer or a group of buyers will likely do by way of due diligence and having almost a dry run putting on the buyer’s hat to kick your own tires is extremely helpful and, in our view, is necessary. It’s the only way that you can assure that nothing’s going to come up that’s outside your control as part of the process.

Yntema: The thing that is big right now is trying to set up recurring revenue, which is a monthly subscription or some kind of guarantee. You see that with car washes now selling monthly passes. That’s an idea to be able to stabilize cash flow. Also make sure that if you are going to be leaving the business, who is your successor? Is it a key employee? Is it going to be an outside person? How dependent is the business on you? … Secure key employees by locking them to longer-term contracts or profit sharing so the owner can exit and still have somebody who knows what they’re doing.

Friar: The number one thing you can do to increase the value, the marketability, and the deal terms – all three of those things will increase – is if you can take a couple steps out of your company and you can document what you do, … delegate your responsibilities to a manager or vice president, and … start documenting some of the processes in the business that are in people’s heads. If that owner is able to step away, buyers are very, very interested.

Siebers: The first thing you need to do is figure out how much your company is worth today and talk to your personal financial adviser and figure out, if you’re going to retire, how much do you need to live on. … If there is a gap and you need to increase the purchase price to maintain your lifestyle, then you need to look at how can you increase revenue over the next two years so you get that premium on the sale of your business so you can live how you want to live.

You need to also ask yourself, ‘If I leave today, can the business run itself?’ If the answer is no, then you need to start looking at a management succession plan. Who’s going to take over management after you leave? If you can’t transition management from a seller to a buyer, the value is going to go down.

And you really need to start looking at your business from the perspective of a buyer. What’s going to be a red flag? Are there key contracts that can’t be assigned? …You have to start thinking about it in terms of ‘if I’m buying and doing due diligence, what’s going to scare me?’

Miller: There are a handful of things they can focus on. One is creating a succession plan if they don’t have one. Building a great management team is really important. Growth is good. Focus on profitability and do some benchmarking. Think through whether the company has a clear, defensible competitive advantage, whether based on cost or some other uniqueness. Think about concentration, whether it’s customer concentration, industry concentration, or supplier concentration. Those are important factors or risks that take time to address.

What comes first – getting to the financial point where you can sell your business or readying yourself emotionally to sell?

Torrence: Definitely the emotional point. A lot of these businesses have grown up with an entrepreneur who has spent most of his or her life building something. That’s their baby. Whether (the buyer is) strategic or private equity, it’s not likely to be business as usual after your sell. (Even if an owner stays with the business afterward) by virtue of selling and taking consideration off of the table, you’re not going to have the same level of control or influence you once did. You just need to get comfortable with that.

Yntema: If it comes down to the two, unless the financial situation is outweighing the emotional, you have to be emotionally ready and prepared to sell, or they’ll figure out a way to kill the deal. They won’t be getting to the financials and they’ll be dragging their feet and ruling out buyers right away.

Friar: For your long-term security, probably getting to that financial place where you can sell is the best idea because you don’t want to put yourself at risk of not having your needs met. On the emotional side, oftentimes owners don’t sell because they’re not emotionally ready, and that’s where it could be a mistake.

Siebers: If you need the money to retire, then reaching that financial state of mind or position is probably more important. If you can get there, then you can start working on it emotionally. If you’re not going to net enough from the sale to support you in retirement, it doesn’t matter if you are emotionally ready to sell. You’re just not ready to sell the business.

Miller: I think the personal is more important. If it’s a lower middle-market, closely-held business … many of these people founded these companies and it’s been a significant part of their lives for many years, maybe decades. They also care deeply about all of the stakeholders of the business, whether employees, customers, suppliers. It’s part of who they are.

What are some signs that it’s time to sell?

Torrence: If you’re in a particular environment where there’s an incredible amount of consolidation, and if you’re not up to being a consolidator and going out to build out and grow beyond just organic growth and add on through acquisitions, you ought to seriously consider what the landscape looks like five years from now. You can very quickly be marginalized if your industry cluster is one of those that is the subject of vast consolidation.

Yntema: We’re getting people who want to retire. We’re getting people who’ve had deaths in the family or have illnesses. And then you have the businesses that are getting the phone call and people throw cash at them and they say, ‘Hey, now is the time.’ You also have people who are ready to move on into a different field. They’ve been in business for a while and want to try something else or start another business.

Friar: If you’re enlightened enough to sense your energy waning for your business, if your spouse is telling you it’s time to retire, and if your financial performance has flat-lined and you know what to do but you’re not doing them, (then) you just don’t have the energy anymore to do it.

Siebers: It’s a combination of factors. You have to be ready to let go yourself or to move on to the next phase of your life. If your entire identity is wrapped up in your business, and you have nothing else going on, what are you going to do the day after you sell your business?

Miller: For most of our clients, it’s personal, driven by either life cycle events or their stage in life, retirement, or sometimes diversifying their net worth. In many cases, it has to do more with that than the state of the market.

- See more at: http://mibiz.com/item/22309-tips-from-5-m-a-professionals-for-business-owners-looking-to-sell#sthash.DuF5tcvH.dpuf

For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.