1. Sell on an uptick so you can sell the future. Although seemingly counter to your business instincts, selling when business is good will enable you to reach for maximum value. Reasonable, projected performance will be much more believable and defensible than if coming off a flat or down year. No matter the rationale for hiccups, even if absolutely plausible, realizing the value of projected performance at closing is much more difficult than if projections are supported by current trends.
2. Be prepared. All businesses, especially smaller firms, have strengths, weaknesses, opportunities and threats. Look in the mirror when considering a sale and do your homework. Get an objective third party that knows your business, the industry and competition and can give you an unvarnished assessment of your business before going to market – it will be invaluable in “packaging” your business.
Highlight the business strengths with compelling and forward thinking strategies supported by real opportunities. Conversely, be candid about weaknesses and threats. Put in place strategies to improve performance that are as well thought out as your “marketing” plan. Above all, anticipate the hard questions from a potential suitor and have straightforward answers. Being real and not in “selling” mode is absolutely necessary to produce the chemistry needed for any transaction to proceed to a close.
3. Hit the hot buttons. Don’t waste your time putting yourself out to market in a random auction process. Bottom feeders litter the landscape. Some are harsh; others can be quite beguiling until the moment of truth when you receive a term sheet. The result is always the same: disappointment, anger, and certainly some loss of confidence.
Instead, direct your advisor to identify those prospects with specific strategic reasons for interest such as client base, vertical penetration, and expertise in leveraging technology in products and/or services. Above all, always seek out buyers where there is a clear and compelling rationale for doing a deal. Stay away from vanilla “market share” interest.
4. Profitability is the “king” of all value attributes. Say what you will about a diverse client base, vertical penetration/domination, technology and growth, They are all important, but the king of all valuation attributes is profitability. If you are considering significant spend on marketing and technology—traditionally the leading below the line expense items—to generate growth, be very critical about the short and longer term impact on profitability. This is not the time to guess or hope. For instance, never build technology that already exists if you can avoid it. Buy it or rent it. Remember, with few exceptions, your business is selling marketing products and services that generate exceptional ROI, not technology per se.
In valuation studies done over the years, profitability is by far the leading attribute of corporate value. The statistics indicate a 2 to 1 weighted average over growth, which is the second leading attribute. In a recently completed transaction, our client’s exceptional profitability was the chief reason we were able to realize a 66% increase in EBITDA multiple over the “market.”
5. Fight seller’s remorse. Like death and taxes you will not be able to avoid it, but seller’s remorse can be managed. Let’s be honest: with few exceptions your business is as dear to you as your family. If you are successful it is because you put as much time, resources and energy (physical and emotional) into building the business as in raising your family. The transaction process is arduous and will always be longer than anticipated, demanding enormous commitment and attention to detail. The process — along with the nagging salesperson’s nature (yours) whispering in your ear that “my business is worth more” — will create the onset of seller’s remorse. How you deal with it will be a major factor in achieving a successful outcome.
Selling a business is not like selling a house. I can’t number the times I have heard M&A advisors referred to as “brokers.” Nothing could be further from the truth. A business is a living entity, not a commodity. It is the sum total of the personality, talent and effort of its staff, including you if you transition with the business. Find an advisor that understands the uniqueness of the business and can communicate that value with knowledge and passion to the market. There is no equivalent of Zillow to determine value when putting your business up for sale. Don’t shortchange yourself here. Transaction costs well invested (banker, attorney, accountant) will result in additional multiples of value.
Set reasonable expectations of value, time and expenses at the outset and stick to them. Write these down and continually refer to them when pangs of seller’s remorse strike. It will be very helpful in keeping your focus and sanity.
All successful business owners have control issues. It’s not if, it’s how they are managed. Once you have engaged an advisor, mapped out a process, and positioned and packaged your business for sale, let your advisor do his or her job. It’s what they do just like you do what you do. It’s the advisor’s job to stay between you and suitors so you can carefully assess and respond to any observations and requests. No shooting from the hip or off the top of the head comments that can create question marks or hesitancy. Often, a significant part of a successful advisor’s value will be the psychological expertise he or she brings to manage the interaction between the client and suitor.
Christian H. Gomez is the managing principal at Mtech Advisors.