In the course of our consulting work within the middle market, we often find that most, if not all, business owners fail to have a plan that includes an exit from their business. It’s not that they fail to see it in the horizon or hope that it will eventually occur, but for the reason that they don’t know where to start, most owners fail to properly prepare for the eventuality of their company’s sale.
Let’s take a recent example from a successful business owner in his late 60’s. Eric had started his business more than 30 years prior and had successfully built a business that provided the lifestyle for which most people dream about. When it came time to engage us as his M&A advisors, there were a few issues that set the deal back by several months. Here are a few areas where our initial client-advisor due diligence alerted us to issues:
- The financials were not an easy to manage system like Quickbooks or something similar. It’s not that our client didn’t have an accountant. He did, but his books were still completed outside of computers. Bizarre given today’s technology, I know, but the owner had spent his time on the core competencies of the business and not on the books. He had considered implementing such a system in the past, but never had “gotten around to it.” Just as a little caveat, but this specific issue is very rare, especially in businesses operating with >$10 million in annual revenue. Businesses that large rarely reach the point of true scale without the proper “scaling” technology in place to make it a reality.
- He was what we might call “the chief cook AND bottle washer.” He did everything. In our initial discussions it was somewhat immediately evident that the business was heavily reliant on him. In the course of business growth, he had failed to hire out management to help assist with some of his own non-core competencies. He had not created a business that could operate 100% autonomously without his own personal touch on everything produced–not the ideal scenario for a potential strategic buyer.
- Vendor contracts and internal records were not where they needed to be to survive a thorough due diligence before deal closing. While a seemingly simple issue, this point alone can provide a heavy sticking point for the due diligence phase prior to closure. In some instances it may prove enough of a headache for the impending acquirer that the deal itself could eventually unravel.
Eric was actually lucky. In some cases, the delays of lack of “business sell-ability preparation” could set the business back by more than just months. It could take a year or more to get the business to the point where it is ready to sell. And, in an era when broad-based market fluctuations could quickly remove the ideal window for M&A timing, getting the business prepared for sale long before the need arises is an absolute necessity.
Understanding the risks and challenges of the business seller, doing a mock due diligence prior to beginning the process, properly documenting all systems and procedures and ensuring employees can carry the weight of such a transition are all crucial sticking points to preparing a business for eventual sale. We’ll certainly revisit specifics later, but it is sufficient to note that true built-to-sell companies are typically turn-key in terms of transfer-ability. So, even if you’re planning on using unique financing options for your M&A, fundamentals must not be ignored in the longer and more essential sale preparation phase of the business.
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck
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