Many business owners do not know what their company is worth until they go to sell their business. The sooner you know, the sooner you can determine the best exit option.
In this podcast you’ll learn:
  • How to structure your company sale
  • Who to find as a likely buyer
  • How to architect the financing behind the deal
  • How to reverse back into what you want out of your exit
  • Making a healthier business before sale

Summary

The guest is John Carvalho, founder of Stone Oak Capital a Canadian M&A investment banking firm, and co-founder of Divestopedia.
John got into M&A 15 years ago when he was a CPA. After auditing and doing verification on different clients' books, he realized he was more interested in business valuations and corporate finance mergers and acquisitions.
John went over to a Big 4 accounting firm for eight years until he felt his skills were at a point where he could start his own firm, Stone Oak Capital.
John started Divestopedia while helping business owners sell their business. He felt there needed to be more information available to help entrepreneurs monetize their life work. He looked online and didn't really see much quality so he started writing blogs around important topics in M&A.
Common topics sellers don't know about:
Valuation
Valuation is complex. Sellers may have a general idea of ranges, but until they talk to a professional, they don't know for sure. Seller's may have a totally unrealistic idea or be kind of reasonable.  Having a valuation early is important.
Unrealistic expectations of what an exit looks like.
Business owners often think a massive competitor is going to walk up and write a massive check. Unless they have a proprietary product or double-digit growth, that's not likely. Determining realistic exit options drives valuations. For example, if the management team is the most likely exit, they're not likely to have a massive bank account. Knowing the legitimate types of buyers early is important.
John's keys to a successful exit:

Start early
Pick a timeframe three years out and work backwards. Three years is usually enough time if the valuation isn't where it is needed to be, levers can be pulled to increase value. There is also enough time to find the ideal buyer.

When the valuation isn't where it needs to be
Sellers know where they would like the valuation to be. If short, what needs to put done to get there? That's Planning 101. Some sellers do not believe in my valuation. They get a second opinion with the hope someone will tell them what they want to hear. John is in the business of being realistic on what exit options are and what valuations are.  It doesn't help anybody to give an unachievable expectation. The benefit of starting early is if it's a number you don't like, we can put a plan in place to get there. 
Exit options
The first question to a seller is, "do you want to get out entirely or do you still want to stay involved?" If the seller wants out entirely, a strategic buyer is the best bet, e.g., a local or regional competitor looking for ROI and/or synergies, or a conglomerate willing to pay more because the seller has a product they can really plug into their operations and take it from a local regional company to something that's more global. 
Then, there are family offices and private equity firms for business owners looking for a capital partner to bring to the table. Understanding the objectives of the business owner determine what's realistic. If not realistic, go back to the drawing board. Maybe objectives change. Maybe the business changes. The more time you have, the easier it is to transform to achieve those goals.
Common objectives:

  • Maximize sales price. 
  • Giving children ownership.
  • Preservation of legacy. 
  • Keeping the management team intact.
  • Maintain some ownership going forward.
Different types of buyers will impact the achievement of each objective and require discussion and adjustment if necessary.
Types of valuations:
John doesn't share rules of thumb because there are no rules of thumb. Anybody that says there is, does not understand valuation.

One valuation he really likes is from the buyer's perspective.

  1. A buyer is going to have to get financing. 
  2. A buyer is going to be looking for a certain rate of return. 
  3. Different buyers look for different rates of return. 

Understanding the deal structure helps to understand the likely buyer and the financing they require. Then, you can work backwards to a valuation based on the equity the buyer puts into the deal and does it provide an adequate return on capital?
Other keys to maximizing return on a sale:

  • Get tax planning involved too to also help with the optimal deal structure. 
  • Spend some money today to create value tomorrow. Buyers recognize they will have to make investments in the business to get it to another level and will knock that off the price.
  • Hire a good advisor.
  • Reduce perception of risk.