At some point, most business owners will ask “How do I sell my business?”. And “How do I prepare my business for sale?” The earlier these questions are answered, the greater the wealth that the owner will accumulate over their life.
The vast majority of businesses are sold once in a lifetime. And many aren’t even sold then, and span generations. As a business owner, when you sell your company, you are venturing into an area where your experience is limited. There are exceptions, but for the majority of owners of middle market companies, a sale is a once-in-a-lifetime experience, and you are at the disadvantage.
By comparison, the buyers are experts, and it is their business to buy businesses. This creates a disparity of knowledge and understanding about what what makes a company an attractive acquisition candidate (aside from a disparity in skill in the M&A process). The challenge to the business owner is that he/she doesn’t actually know what the buyers want. They likely know the market for their products very well, but they commonly don’t really know the market for their company.
Try thinking about your company as a consumer product, like a hamburger. There are other competing product offerings – hamburgers – on the market, each with their own attributes: size, flavor, texture, type of bun, condiments, weight of the beef patty, packaging, price and experience consistency. Has your company been positioned to attract customers? That is, is the design of your hamburger specifically addressing the needs of your consumer based upon market research?
Depending on whether your company was developed with an exit in mind, the sale process might be measured in single-digit months if it is well prepared, or measured in years if it needs repositioning. If its poorly positioned, it could also end up as a liquidation. Which direction the exit takes depends whether the company was created to attract buyers.
Here are a few attributes financial buyers look for:
1) The company runs itself
2) It’s scalable
3) It has a defensible niche or other competitive advantage
Companies that run themselves have good management that are independent of the owner. A marker of this is whether the owner can go on vacation without worrying about what is going on back home. To do this, the company needs a sales manager and top salesman, neither of which are the owner. The company has a head of operations that is grooming their own successor. And it has strong financial management capable of standing its ground against the VP of Sales (and the owner).
A company that runs itself has invested in its people and processes. Policies and procedures are codified. It has systems, controls, and key performance indicators that are compared regularly to actual results. There are best practices that have been put in writing. Training is passed from more senior to less senior people, and jobs are cross-trained. The company is not dependent on any one person.
A company that runs itself has a long-term plan. The plan determines – by default – the company’s priorities and activities in the short term and medium term. The energies of the company are focused and used efficiently, since they are not wasted due to conflicting goals. The long-term plan also matters because financial buyers will own the company for about 7 years, and will sell it to someone else that may own it even longer. As a result, the buyer is looking out at least 14 years, because he is going to be facing his own buyer in 7 years. That is the vision the company has to try to take into account in forming its strategic plan. In addition, the company has stayed abreast of technology and other industry developments, because 15 years is a long time and getting behind the curve can be quite fatal.
Scaleable companies are lean and have a flexible design that permits growth without a requisite increase in costs. The systems, training programs, and sales effort can be ramped up and result in an increase in EBITDA margins. The company has a management team that can handle growth as-is, or it has a system to efficiently train and expand its human capital.
Companies with a defensible niche know their customer, their competitors, their suppliers, their industry, and most importantly, themselves. They have thoughtfully analyzed their own profitability, where they make their highest margins, where they can obtain the greatest return on capital, where the long term growth of the market will come from, and how they will position themselves for it. The company has created itself around a unique capability, and it’s not quite like any other company in this regard. This is their special sauce, and buyers seek acquisitions that have one.
If you don’t sell your company to a financial buyer, then it’s even more important to have a special sauce. Strategic buyers are interested in that certain indescribable something, je ne sais quoi. It may be a technology, process, knowledge, market, or something else altogether. It is certainly a form of Intellectual Capital. That is a certainty because tangible assets can be acquired anywhere.
The special sauce of one company was its new product development process. The company had been in workout at two banks in a row, and had a nearly valueless equity position. As a last attempt to survive, it brought in a new president who transformed it. But the key was that he put in place a new product development model that eliminated the bottom one-third of their products every year and created a new third. Not only did this create variety for the consumer, it allowed greater pricing strength with his distributors. In just a few years, the equity value of the company went from virtually zero to $40 million when it was sold to a strategic buyer who valued it as much for its new product development model as for the rest of its attributes.
The takeaway is that you need to know what prospective buyers of your company want, and then create a special aspect of your company to meet their needs. You need to do that with your company just like you do in creating the deliverables for your own customers. To learn more about exit planning and mergers and acquisitions, contact us.
by Charles SmithMr. Smith is the founder of Pegasus Intellectual Capital Solutions, a boutique investment bank specializing in mergers and acquisitions, Capital Raising and restructuring and workouts. The firm is an innovator in the use of Intellectual Capital Audit for pre-closing due diligence and in turnarounds. Charles can be reached at firstname.lastname@example.org
See also: Preparing a Company for Sale