17 Feb How to Sell Your Business for Maximum Value
Life events are called such because of their relative weighty significance in the broad scheme of life. They’re also relatively infrequent, which places further emphasis on their importance. Selling one’s privately-held business is one of of those “life events” not to dissimilar from marrying a child or graduating from grad school. As such, its importance should never be discounted. In fact, everything leading up to the sale should be considered the preparation before the harvest. Weeds are plucked, plants are watered, the garners are cleaned–everything is prepared for a very feverish but brief period when the business is ultimately sold. The struggle with most business owners is that they work in their businesses and not on them (a faint whispering deja vu from the fantastic book “The E-Myth Revisited”).
Most people don’t think about building a business they can sell. I want to lay out a few interesting points that I’ve found are extremely helpful in preparing your business for sale years before the event even happens.
What is a P&L?
We’re working with a client in a rapidly growing segment within the big data and cloud hosting. The owners are making excellent profits for a couple of marketing and tech geniuses out of a garage, but they know next to nothing about accounting and finance. I’m being a bit dramatic, but their understanding of the financials was surprising, especially given their near seven-figure salaries–pulling profits out of the biz willy-nilly like their own little piggy bank. Reverse engineering the the financials from
From the outset, trusted financials are an absolute must.
Like we’ve suggested here, all good companies should perform a regular check-up on business value, if nothing more than to give shareholders a reality check.
I’ve a current client who runs a very successful services business, delivering expert solutions to the likes of MSFT & GOOG. However, his expectation on the payout he’ll receive for his company is highly unrealistic. In fact, here’s a direct quote from a conversation I had with him over lunch recently:
We’ve got such a great company, I would expect a strategic acquire would look at us much like Facebook looked at Instagram.
The anomalies on the fringes are so often far into the upper quartile that thinking the exceptions are the the rule can be dangerous. Maximizing your company’s value involves first knowing the value and then knowing the key components of taking it higher. My personal suggestion is a minimum of an annual assessment of company value. This will provide several key insights:
- Value Drivers. Understanding value — and particularly how it changes based on internal and macro forces — is extremely helpful when working to boost it.
- Real Expectations. When the actual time to sell the company arises, there’s less of a “oh, I thought my company was worth more than that.” Expectations are kept in check.
- Armor Chinks. Put simply, valuations can help expose the areas of greatest weakness, proving further insight into how improvements can be made.
Doing the Deal
I had a wise friend once tell me-after he sold his business for about $7M:
The most money you will ever make is during negotiations.
ROI maximization in mergers & acquisitions is best performed by enhanced negotiation techniques. Each good deal-maker has their own methodology. Here are my personal steps for reaping the most out of one of the most important life events you may have.
- Clean it up. I have a great contact within my network here in the Seattle area who is the CFO of a $1B privately-held company. Since becoming the CFO, he informed me that his entire job there is to make the financials so flawless that when it comes time to sell the company in the next couple of years, they’ll be able to get top dollar. Lamborghinis sure look nice, but the real sexy part is when you can take a look under the hood when the engine is revving. The same holds true for any business that truly churns out the cash.
- Make it presentable. Of course, buffing the exterior is also helpful. That includes alignment of goals and strategy with employees, partners, suppliers and customers. A well-oiled machine is more than just window dressing a balance sheet or cleaning up the income statement. Putting your ducks in order also helps in greasing the skids in due diligence.
- Source and market to strategic buyers over financial buyers. Holding out for strategic buyers is a strategy that can increase your payout by double-digit percentages. There are a couple of good articles outlining the difference. You can find them here and here.
- Treat it like an auction. When it comes to buying furniture or cars, auctions can produce some excellent deals for potential buyers. Selling businesses is a whole different ball game. Auctions tend to produce premium purchases. In an auction scenario like this, the sellers are not auctioning off a commodity, but a company that typically provides superb cash-flows can command a premium price, especially if it represents a 2 + 2 = 5 performance scenario for a strategic acquirer.
Here’s a specific example. A recent client was looking to sell his business. The company was kicking out about $2M EBITDA annually. It was a good little business that had been in the family for over 50 years. The original owners were in their 90s and the current owner/manager was looking to retire himself. It was time to sell. Luckily, he had done a very good job on steps 1 and 2 above. We brought multiple strategic buyers to the table in a structured and time-sensitive auction. When the dust finally settled and the two remaining strategics were done battling over the company, the final closure price was a 40% premium over our initial valuation for the firm. The win for the owners could not have been overemphasized.
Unfortunately, some life events will never be easy to plan for. Some are sudden and unexpected, like the death of a loved-one. For those strategically deliberate events, a healthy dose of realism and massive binge of preparation will be essential to ensure the best possible outcome. While there is some luck to success and achievement, a big part of it is is completely deliberate. Make your deliberate impact when it counts the most.