It’s natural for business owners to be focused on the daily operations of their company, and not think about transitioning out of their business until they are actually ready to proceed. Working with mid- to small-businesses owners every day, I consistently advise my clients that advance planning — combined with an understanding of the transactional scope — is critical to the successful sale or transition to a family member. We tell business owners that they should think about their exit strategy the day they start their business. What should business owners be thinking about in relation to selling their business? I reached out to Ari Fuchs, Director, The DAK Group, Investment Bankers to the Middle Market. I asked Ari to discuss the 7 most important things a business owner should know – even before they are thinking about selling their business.
Brent Beene: What is the best way to advertise that your business is for sale?
Ari Fuchs: This is often one of the biggest concerns for a business owner. Unlike selling a home, where you want to draw attention to it, and reach a wide audience; when selling a business you want to do it in a discreet and confidential manner, so you do not raise concern with your customers, suppliers or employees. Typically, a focused and strategic process to identify and approach only “the right” buyers is best.
Brent Beene: Why would an acquirer be interested in my business?
Ari Fuchs: Acquisitions occur for many reasons. The top 5 reasons for acquisitions include:
- Synergies: Combining businesses with complementary strengths and weaknesses may enhance topline performance while driving costs down.
- Diversification: Businesses often make acquisitions in adjacent (sometimes unrelated) industries in order to diversify their business model by providing new avenues for growth while reducing market/industry risk. Acquiring technologies, skills, products or services to close a gap in an acquirer’s platform can serve to accelerate diversification and growth.
- Growth: Acquisitions can often give the acquiring entity the opportunity to buy market share without having to build internal infrastructure to expand market share themselves. Similarly, smaller companies with innovative products or services often lack the resources needed to achieve mass market access. An acquisition by a larger entity with an established sales force can accelerate product introductions into new markets.
- Supply Chain Leverage: Buying out a supplier or distributor will often eliminate a level of costs while enhancing margins.
- Performance Improvement: This strategy is most often employed by private equity firms who seek to improve the margins and cash flows of their portfolio companies by taking strategic steps to accelerate growth or radically reduce expenses.
Brent Beene : What is the single best piece of advice you can give a business owner who may be thinking about selling their business?
Ari Fuch: Brent, that is a great question and the answer is so straightforward that many owners inadvertently miss this fundamental step: It is critically important to have your business ready for a sale process. That means preparing it well in advance of when you’re planning to put it on the market. Look for ways to increase earnings and maximize profitability now so you will have an established track record by the time you approach the market. If you wait to optimize efficiencies until you’re ready to sell, your greatest opportunity to build value may be lost. By keeping your focus on building operational efficiencies now, you’ll increase value at the closing table.
Brent Beene: How do prospective buyers determine the value they will offer a company?
Ari Fuchs: The value of a business can vary widely depending on the fit with any given acquirer. As a result, many business owners don’t fully understand the potential value of their companies. While factors like multiples of revenue or EBITDA can be helpful in establishing benchmarks, they are far from conclusive when it comes to defining market value. Why is this? It is absolutely essential to understand business value from the buyer’s perspective. Often the motivation behind a given suitor’s interest in a business is not obvious. Their view of its value may be completely different than yours. Buyers are often willing to pay higher prices based on their economics, synergies, specific goals or even the reputation of a target business. Buyers may see tremendous value in an area of the company that the business owner may not have even considered as valuable such as: distribution network, technology or geographic reach. The value these “hidden” factors will bring to the buyer may entice them to pay a premium for the acquisition. It is important to understand all your company’s value drivers to avoid leaving money on the table.
Brent Beene: How early should a business owner begin preparing to sell their business?
Ari Fuchs: The best time to start your exit planning process is when you start (or buy) your business. Sophisticated entrepreneurs and institutional investors (such as private equity firms) often think about their exit before they even acquire or launch their business, building their exit into their business plan or investment thesis. Taking a proactive approach to exit planning will allow you to set a clear strategy that will enable you to build your business in a way that maximizes value at exit. Don’t worry if that time has already passed – the reality is such that it is never too late to begin thinking about your exit. So if you have not done so yet, the time to start planning is now.
Brent Beene: How should a business owner start to prepare to sell their business?
Ari Fuchs: The first step in the journey to sell one’s business is to assemble a trusted team of independent professional advisors that will represent your interests in the sale process. The critical members of your team should include your accountant, lawyer, investment banker and wealth management professional. It is important that each member of your team be experienced in advising and executing merger and acquisition transactions for companies of your size.
Brent Beene: What are the most common mistakes made by sellers?
Ari Fuchs: Years of experience advising middle-market business owners has helped us uncover the most common (and costly) mistakes made by business owners during a sale process. Those mistakes are:
- Not Planning Ahead. Business owners that don’t plan ahead for a sale transaction are most often the ones that will leave a substantial amount of value on the table. Planning ahead (18+ months minimum) will ensure you have enough time to implement strategic initiatives to maximize value on sale.
- Single Buyer Process. The Single buyer process lacks the competitive dynamic that broader auctions provide. When a single buyer is left to determine business value, a below market price is often the result. A single buyer is usually a competitor or another business looking to integrate, they “knock on your door” with an offer. Even If the offer sounds “good”, you have no comparison for how much you actually might earn if a competitive process was initiated.
- Taking Your Eye off the Ball. When business owners shift their focus away from managing their business to managing the sale process, performance often falters, giving buyers an excuse to renegotiate value. You need to continue doing the things you’ve been doing to make your business successful. Your assembled team of advisors will manage the process and keep it moving forward without overly distracting you from your primary mission of keeping your business running successfully.
Ari, thank you for sharing your professional insights with us. You’ve highlighted really important components that all business owners should be aware of and thinking about today. I know The DAK Group has recently published a Business Owners Guide, 12 Critical Steps to Prepare Your Business for Sale, which is available through DAK’s website: http://www.dakgroup.com/12-critical-steps/. And if you are a business owner in New Jersey, I want to remind those readers to be especially cognizant of the recent estate tax law changes and what that can mean for your personal and professional financial situation. You can access our article here.
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